Better Retail Buy: Aritzia Stock or Lululemon?

Choice of fashion clothes of different colors on wooden hangers

Retail stocks such as Lululemon (NASDAQ:LULU) and Aritzia (TSX:ATZ) have delivered contrasting returns to shareholders in 2023. While the stock markets have staged a rebound this year, LULU stock has surged 26% in the first eight months of 2023. Comparatively, ATZ stock is down 48% year to date.

It also suggests Lululemon stock trades just 16% below all-time highs, while Aritzia is down 55% from record prices. Let’s see which retail stock between the two is a good buy at the current valuation.

The bull case for Lululemon stock

Valued at a market cap of US$51 billion, Lululemon is one of the hottest retail stocks globally. Despite a sluggish macro environment and rising costs, the company increased gross margins by 230 basis points to 58.8% in the fiscal second quarter (Q2) of 2024 (ended in July), showcasing its pricing power.

Lululemon reported revenue of US$2.20 billion and adjusted earnings of US$2.68 per share in fiscal Q2. Comparatively, analysts forecast revenue of US$2.17 billion and earnings of US$2.54 per share in the quarter.

The company attributed its stellar results to its differentiated business model, innovative portfolio of products, and a “portfolio approach to growth.” Sales in Q2 were up 20% after adjusting for currency fluctuations, while same-store sales grew 7%. Lululemon opened 10 net new stores in the last three months, bringing the total store count to 672.

Direct-to-consumer (DTC) sales accounted for 40% of total sales, while international sales were up 52% year over year. China continues to be a crucial market for Lululemon as sales in this region grew 61% year over year.

In the last six months, Lululemon reported operating cash flows of US$522.2 million, up from US$145.6 million in the last year, allowing the company to end Q2 with US$1.11 billion in cash.

Priced at 33.3 times forward earnings, Lululemon stock is forecast to grow adjusted earnings per share by 18.3% annually in the next five years.

Is ATZ stock a good buy right now?

Compared to Lululemon, Aritzia is a much smaller company, valued at $2.75 billion by market cap. ATZ stock over 20% in a single trading session in July after it reported fiscal Q1 of 2024 (ended in May) results. While sales were up 13.4% at $462.7 million, net income fell by 47% to $17.5 million in Q1.

Aritzia attributed its decelerating top-line growth and falling margins to economic pressures and the lack of new product lineups.

It now forecasts fiscal 2024 sales to range between $2.25 billion and $2.35 billion, below its previous guidance of between $2.42 billion and $2.5 billion. Aritzia also estimates gross margins to fall by 300 basis points year over year to 38.6%.

Priced at 27 times forward earnings, ATZ stock might see earnings per share narrow by 50% to $0.92 per share in fiscal 2024. Due to its recent pullback in share prices, analysts expect ATZ stock to gain 50% in the next 12 months.

The Foolish takeaway

Despite its steep multiples, I would choose Lululemon over Aritzia due to its widening profit margins, robust economic moat, consistent cash flows, and expanding presence in emerging markets such as China.

The post Better Retail Buy: Aritzia Stock or Lululemon? appeared first on The Motley Fool Canada.

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aritzia. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.