We recently published a list of The 10 best clothing stocks to buy now. In this article, we take a look at how Lululemon Athletica Inc. (NASDAQ:LULU) compares to other apparel stocks.

Trends in the clothing industry

The internet has changed the way people buy clothes. Social media platforms and influencers have popularized “haul culture,” where people order large boxes of inexpensive clothing online and then browse through them. Also known colloquially as the “Shein effect,” people are turning to fast fashion and ordering clothes that offer an element of surprise upon receipt. Although Shein’s main suppliers are based in China, its customers are primarily based in the United States. The company’s global sales reached around $30 billion last year, nearly matching the $39 billion global sales of Inditex, the old-school fast-fashion leader and owner of Zara.

Fashion and apparel are among the world’s most significant industries and create important value for the global economy. According to McKinsey, this would make it the world’s seventh-largest economy when compared to individual country GDPs. However, the industry faced several challenges in 2023, with the United States and Europe experiencing slow regional growth throughout the year. While China began the year with a strong performance, it gradually tapered off and slowed down in the second half. Even the luxury segment saw uneven performance and lower sales. The fashion industry in 2024 can therefore be described in one word: uncertainty. Weaker economic growth, dwindling consumer confidence and rising inflation are making it difficult for companies to develop suitable performance drivers. A Reuters report showed that consumers are becoming more selective in their clothing choices and are shopping more. This has led to 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 varying by country and region. The luxury segment is expected to make the biggest economic gain, but that does not mean that companies in this sector will not experience difficult economic conditions. The global growth forecast for the industry is lower in 2024 compared to 2023, falling to 3-5% from 5-7% in 2023 as shopping sprees come to a halt after the pandemic. Growth in China and Europe is expected to slow, but the US market shows a completely different forecast. Growth in North America is expected to pick up in 2024 after a sluggish 2023, reflecting the region’s more optimistic forecast.

The story continues

In addition, the current political unrest in Bangladesh is expected to affect the global apparel industry, disrupting the work of global clothing retailers from H&M to Zara. As these apparel giants head into the crucial holiday season, the disruptions could cause heavy losses for U.S. retailers and Bangladesh itself, which is the world’s third-largest apparel exporter as of 2023. Overall, consumer behavior in the U.S. has slowed, with people making do with what they have in their closets before the season changes. The Federal Reserve is also expected to cut interest rates in September. A report from Reuters showed that investors had previously bet that the Fed would cut rates by half a percentage point and now estimate a probability of about 75% for a quarter-percentage point cut at its September meeting. This should boost consumer confidence and ease spending behavior. With that in mind, let’s look at the 10 best apparel stocks to buy.

Our methodology

For this article, we used Finviz’s stock screener to identify over 20 apparel stocks. We then narrowed our list down to the 10 stocks with the most upside potential from current levels and listed the stocks in ascending order of their upside potential (as of August 19). We only selected stocks with a market cap of over $2 billion.

At Insider Monkey, we’re obsessed with the stocks hedge funds invest in. The reason is simple: Our research shows we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (Further details can be found here).

A store clerk in a sportswear store replenishes her inventory.

Lululemon Athletica Inc. (NASDAQ:LULU)

Upside potential from current level: 39%

Founded in 1988, Lululemon (NASDAQ:LULU) is an athletic apparel, footwear, and accessories brand with approximately 38,000 employees. The company sells casual and athletic apparel, as well as accessories such as socks, bags, and yoga mats that people can use during fitness activities. Earlier this year, Lululemon (NASDAQ:LULU) launched its first-ever men’s collection, expanding its distribution to a whole new level. Its new casual and innovative performance shoes also made their debut for the spring and summer 2024 season. The Canada-based company has partnered with the Canadian Olympic Committee (COC) and the Canadian Paralympic Committee (CPC) to launch its first-ever summer athlete kit for Team Canada ahead of the 2024 Paris Olympic and Paralympic Games. This is the second time that Lululemon (NASDAQ:LULU) has served as the official supplier of Team Canada as part of a multi-year partnership with CPC and COC.

Is Lululemon (NASDAQ:LULU) a good investment? In the first quarter, the company’s revenue rose 10% year over year to $2.2 billion, and comparable sales rose 6%. However, demand in North America disappointed investors, growing only 3%, compared to 17% growth in the first quarter of 2023. Lululemon CEO Calvin McDonald attributed the underperformance to a “too narrow color assortment” of its products, along with a lack of appropriate product sizes that led customers to believe their desired items were always sold out. However, the company expects to correct these errors in the second quarter and has significant growth potential.

There are several reasons for this optimism, the most important being the company’s steady growth over the past few years. Lululemon’s (NASDAQ:LULU) revenue more than doubled from $4 billion to $9.6 billion between fiscal 2019 and fiscal 2023. Net income also grew at a compound annual growth rate of 24.5%, from $646 million in 2023 to $1.55 billion in 2024. For these reasons, the stock ranks first on our list of the best apparel stocks.

The company’s “The Power of Three x2” strategic goals set in 2022 as a follow-up to the original 2019 plan have enabled Lululemon (NASDAQ:LULU) to drive growth by focusing attention on its three pillars: product innovation, guest experience, and market expansion. Overall, the stock is widely rated as a “Buy” by analysts, and its median price target implies 39% upside from current levels.

Middle Coast Investing stated the following about Lululemon Athletica Inc. (NASDAQ:LULU) in its second quarter 2024 investor letter:

The company has expanded from one store in Vancouver to nearly 711 stores worldwide, giving it ample potential to become a leading global brand. Lululemon (NASDAQ:LULU) expects net sales to exceed $10 billion in 2024, representing growth of between 11% and 12%. 45 hedge funds hold shares valued at $10 billion.

10.62 billion at Lululemon from Q2 2024.

Overall LULU 1st place on our list of the best clothing stocks to buy. While we recognize LULU’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than LULU but trades at less than 5 times its earnings, read our report on the cheapest AI stock.

Read next: Analyst sees a new $25 billion ‘opportunity’ for NVIDIA and Jim Cramer recommends these 10 stocks in June.

Disclosure: None. This article was originally published on Insider Monkey.