We recently compiled a list of the 10 Best Clothing Stocks To Buy Now. In this article, we are going to take a look at where Lululemon Athletica Inc. (NASDAQ:LULU) stands against the other clothing stocks.
Trends in the Clothing Sector
The internet has changed the way people shop for clothes. Social media platforms and influencers have popularized the “haul culture,” where people order a big box of low-priced clothes online and sift through them. Also colloquially known as the “Shein effect,” people are turning towards fast fashion, ordering clothing that offers an element of surprise upon receiving. Although Shein’s primary suppliers are in China, its customers are majorly US-based. Its global sales reached around $30 billion last year, almost touching the $39 billion in global sales made by Inditex, the old-school fast fashion leader and owner of Zara.
Fashion and apparel rank among some of the most significant industries in the world, creating key value for global economy. According to McKinsey, it would rank as the seventh largest economy in the world if placed alongside the GDPs of individual countries. The industry, however, faced several challenges in 2023, with the United States and Europe experiencing slow regional growth throughout the year. While China started the year with a strong performance, it gradually waned, slowing down in the second half. Even the luxury segment experienced uneven performance and slower sales. The fashion industry in 2024 can thus be described with one word: uncertainty. Weaker economic growth, dwindling consumer confidence, and rising inflation are making it hard for companies to devise suitable performance drivers. A report by Reuters showed that consumers are becoming increasingly picky about the clothes they buy, and are shopping around more. This has resulted in a “patchwork of winners and losers.”
Fashion forecasts by McKinsey show that the industry is expected to grow by 2-4% in 2024, with growth variations across countries and regions. The luxury segment is anticipated to generate the largest economic profit, but that does not mean companies in this sector won’t experience tough economic environments. Global growth forecast for the industry is lower in 2024 compared to 2023, going from 5%-7% in 2023 to 3%-5% as post-pandemic shopping sprees halt. Growth in China and Europe is expected to slow, but the US market shows a completely different outlook. North America’s growth is expected to pace in 2024 after a sluggish 2023, reflecting the region’s more optimistic outlook.
In addition, the current political unrest in Bangladesh is expected to affect the global clothing industry, disrupting the functioning of global apparel retailers ranging from H&M to Zara. With these clothing giants heading into key holiday season, the disruptions might incur heavy losses to US retailers and Bangladesh itself, which is the third largest exporter of clothing in the world as of 2023. Overall, consumer spending patterns have slowed down in the US, with people making do with what’s in their closets before the season changes. The Federal Reserve is also expected to cut interest rates in September. A report by Reuters showed that investors previously bet that the Fed would slash rates by half a percentage point, and are now estimating an approximately 75% probability of a quarter-percentage-point cut in its September meeting. This is expected to drive consumer confidence and ease spending patterns. With that, let’s look at the 10 best clothing stocks to buy.
Our Methodology
For this article, we used the Finviz stock screener to identify over 20 clothing stocks then narrowed our list to 10 stocks with the most positive upside from current levels, and listed the stocks in ascending order of upside potential, as of August 19. We only chose stocks that had a market cap of over 2 billion.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A store employee in an athletic apparel store restocking merchandise.
Lululemon Athletica Inc. (NASDAQ:LULU)
Upside from Current Levels: 39%
Founded in 1988, Lululemon (NASDAQ:LULU) is an athletic apparel, footwear, and accessories brand with around 38,000 employees. It sells leisure-athletic wear and accessories such as socks, bags, and yoga mats that people can use when engaging in fitness activities. Earlier this year, Lululemon (NASDAQ:LULU) released its first-ever men’s collection, expanding its sales to a whole new avenue. Its new casual and innovative performance footwear also made a debut for the spring and summer 2024 season. Headquartered in Canada, the company partnered with the Canadian Olympic Committee (COC) and the Canadian Paralympic Committee (CPC) to launch its first-ever summer Athlete Kit for the Canadian Team ahead of the 2024 Paris Olympic and Paralympic Games. This is Lululemon (NASDAQ:LULU)’s second time acting as the Official Outfitter of the Canadian Team in a multi-year partnership with CPC and COC.
Is Lululemon (NASDAQ:LULU) a good investment? In Q1, the company’s revenue grew 10% year over year to $2.2 billion, and its comparable sales grew by 6%. However, demand in North America disappointed investors, increasing by only 3% as compared to a 17% growth in Q1 2023. Calvin McDonald, Lululemon’s CEO, attributed the underperformance to an “overly narrow color assortment” in its products, along with a shortage of adequate product sizes that led customers to believe that their desired items were always out of stock. However, the company expects to work on these errors in Q2, and has significant potential to grow.
There are several reasons for this optimism, the foremost being the company’s steady growth over the past years. Lululemon (NASDAQ:LULU)’s revenue jumped from $4 billion to $9.6 billion between FY2019 and FY2023, undergoing a more than double increase. Its net income also grew at a CAGR of 24.5%, from $646 million in 2023 to $1.55 billion in 2024. These reasons give the stock the first spot on our list of the best clothing stocks to buy.
The company’s “The Power of Three x2” strategic goals set in 2022 as a follow-up to the original plan set in 2019 has allowed Lululemon (NASDAQ:LULU) to drive growth by focusing attention on its three pillars: product innovation, guest experience, and market expansion. Overall, the stock sports a consensus Buy rating among analysts, and its median price target implies an upside of 39% from current levels.
Middle Coast Investing stated the following regarding Lululemon Athletica Inc. (NASDAQ:LULU) in its Q2 2024 investor letter:
“I mentioned last quarter and higher above that I like buying quality stocks on sale. Lululemon Athletica Inc. (NASDAQ:LULU), the 2nd worst performer in the S&P 500 this year, qualifies. I published a full thesis on the stock before its most recent earnings, but the basics: the yoga pants and clothing company has had an amazing post pandemic run that is approaching its end. Its growth in the U.S. is slow/non-existent at the moment, but it is growing very fast in China and Europe. I think that international growth is likely to endure, and that its U.S. slowness is likely to be temporary. Lululemon shares are not ‘cheap’, but they are on sale for an average price, and I think the company will grow faster than average over the next five years. I would be wrong if Lululemon is a fad gone bust, or faces a huge post-pandemic hangover as people get used to leaving the house more. We’ll see.”
The company has expanded from one store in Vancouver to nearly 711 stores across the globe, and thus holds sufficient potential to grow into a globally dominant brand. Lululemon (NASDAQ:LULU) expects the net revenue for 2024 to exceed $10 billion, undergoing a growth of between 11%-12%. 45 hedge funds hold stakes worth $10.62 billion in Lululemon as of Q2 2024.
Overall LULU ranks 1st on our list of the best clothing stocks to buy. While we acknowledge the potential of LULU as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LULU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.