2 Reasons to watch LULU and 1 to stay cautious

Lululemon's stock price has taken a beating over the past six months, shedding 26.8% of its value and falling to $104.24 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Given the weaker price action, is now a good time to buy LULU? Find out in our full research report, it's free .

Why does LULU stock spark debate?

Originally serving yogis and hockey players, Lululemon (NASDAQ:LULU) is a designer, distributor, and retailer of athletic apparel for men and women.

Two positive attributes:

1. Store growth signals an offensive strategy

A retailer's store count influences how much it can sell and how quickly revenue can grow.

Lululemon sported 825 locations in the latest quarter. Over the last two years, it has opened new stores at a rapid clip by averaging 7.2% annual growth, among the fastest in the consumer retail sector. This gives it a chance to become a large, scaled business over time.

When a retailer opens new stores, it usually means it's investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

2. Elite gross margin powers best-in-class business model

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

Lululemon has best-in-class unit economics for a retailer, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 57% gross margin over the last two years. That means Lululemon only paid its suppliers $43.02 for every $100 in revenue.

One reason to be careful:

Flat same-store sales indicate weak demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Lululemon's demand within its existing locations has barely increased over the last two years as its same-store sales were flat.

Final judgment

Lululemon's merits more than compensate for its flaws. After the recent drawdown, the stock trades at 12.2× forward P/E (or $104.24 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it's free .

High-quality stocks for all market conditions

ONE MORE THING: Top 5 Growth Stocks.The biggest stock winners almost always had one thing in common before they ran. Revenue growing like crazy. Meta. CrowdStrike. Broadcom. Our AI flagged all three. They returned 315%, 314%, and 455%, respectively.