There’s no question that Lululemon Athletica (NASDAQ: LULU) has been a fantastic investment to own over the years. The stock is up an impressive 266% over the past five years (as of May 17), crushing the S&P 500‘s 53% gain. And even in 2023, shares have climbed 16%, a higher rise than the overall market. Given how well the business has performed from a fundamental perspective, it’s easy to see why shareholders have been rewarded so much.

But at this moment in time, is Lululemon stock a buy, sell, or hold? Let’s take a closer look at this booming apparel business in order to answer that pressing question.

Lululemon’s business is firing on all cylinders

While many companies continue to struggle with the uncertain economic environment, particularly as it relates to high inflation, rising interest rates, and the threat of a recession, Lululemon’s business has benefited from strong momentum. The athleisure pioneer generated $2.8 billion of revenue in its fiscal 2022 fourth quarter (ended Jan. 29), up 30% year over year. And digital sales accounted for 52% of the overall business in the period.

Lululemon is an especially profitable enterprise. The apparel industry is hyper-competitive, as consumers have a seemingly unlimited number of choices in front of them. But by focusing on the premium end of the spectrum, Lululemon has carved out a valuable niche that has boosted its bottom line. During fiscal 2022, the company registered a gross margin of 55.1% and an adjusted operating margin of 28.3%. These figures were better than the heavyweight leader of the industry, Nike.

What’s more, Lululemon’s adjusted diluted earnings per share of $4.40 represented an impressive 31% year-over-year jump. Inventory gluts and inflationary pressures are hurting the margins for other companies in the space, but Lululemon appears to have handled these headwinds successfully. That’s because the leadership team does a wonderful job of managing merchandising.

“One thing to add is that we do not drive our client growth through discounts or promotions, and we have no intentions to do so,” CEO Calvin McDonald said on the fourth-quarter 2022 earnings call when discussing the increased use of markdowns in the industry. He continued: “We run a full-price business with markdown strategically used to clear seasonal and other select product, and this will remain our approach in the future.”

This strategy certainly helps explain why Lululemon’s brand is so strong, and its margins have held up extremely well in recent quarters. Shareholders can appreciate this type of resilient business model.

Management sees the remarkable gains continuing, with the expectation that revenue will total $12.5 billion in fiscal 2026 (compared to $8.1 billion in fiscal 2022). Key to this long-term financial target will be the growth of the men’s segment, digital channel, and international markets, areas the business has already shown progress in.

There’s one obvious reason to sell the stock

It’s hard to deny how wonderful a business Lululemon is. The company has found tremendous success in an otherwise highly competitive industry by focusing on the high-end side of the market. And fast growth is very much still in play over the next several years. Who wouldn’t want a piece of this enterprise in their portfolio?

However, investors must also pay attention to the price being paid for all of these positive attributes. The stock has been a huge winner over the years. And it currently trades at a price-to-earnings ratio of 56. That’s in line with the stock’s trailing-five-year average valuation, but it’s significantly above where Lululemon started trading in 2023.

At this expensive valuation, Lululemon doesn’t look like a screaming buy right now. And for shareholders who are still bullish on the company’s long-term prospects, holding on is a reasonable course of action. That’s because it would be a challenge to let go of such a wonderful business. However, investors who have benefited from Lululemon’s outstanding returns thus far might also consider now a great time to sell and take profits.

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Neil Patel has positions in Lululemon Athletica. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.

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