Buying shares of growing companies for less than their worth is how great investors like Warren Buffett amassed a fortune. The uncertainty in the economy over higher costs from tariffs has particularly weighed on the stocks of retail brands.
Investors focused on the following companies’ long-term trajectories could end up earning market-beating returns once all the dust settles. Deckers Brands (DECK -3.63%) and Lululemon Athletica (LULU -0.92%) still have attractive long-term growth prospects, while their share prices are trading at unusually low multiples of their earnings.
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1. Deckers Brands
Deckers Brands has been a stellar performer over the last few decades. A $10,000 investment 20 years ago would be worth more than $900,000 at this writing. The company owns the popular footwear brands UGG and Hoka, which continue to experience growing demand. The stock is starting to rebound after falling more than 50% from its recent highs.
For investors focused on long-term returns, this is a great opportunity to invest in a quality growth stock at an attractive price-to-earnings multiple.
Deckers’ strong growth and margin performance in a promotional sales environment speak volumes about the strength of its brands and ability to navigate through the headwinds around tariffs. In the most recent quarter, revenue grew 17% year over year to $1.8 billion, driven by growth from UGG and Hoka.
Specifically, UGG sales grew 16% over the year-ago quarter, which is impressive considering how long this brand has been around. It continues to build brand awareness, including with its UGG men’s line.
Most impressive are the booming sales of Hoka, which posted a year-over-year sales increase of 24% last quarter. Deckers acquired the brand in 2012, and it is clearly emerging as a mainstream performance footwear brand. Hoka now generates almost a third of the company’s revenue.
Importantly, Deckers still has a huge opportunity internationally, where brand awareness is still low. But it is making progress, as international sales grew 28% year over year last quarter.
Deckers will report its March-ending fiscal fourth-quarter earnings results in the coming weeks, but management’s guidance calls for a revenue increase of 15% for fiscal 2025. Analysts expect the company’s earnings to grow 15% annually in the coming years.
Given the continued strong growth of its top brands, the stock is attractively priced at just 20 times forward earnings estimates.
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2. Lululemon Athletica
Lululemon Athletica is another growth stock that has fallen around 50% from its recent highs and is trading at a valuation that seems to undervalue its future prospects. This apparel brand has posted consistent double-digit revenue growth for years, and like Deckers, it still has ample opportunities to increase brand awareness.
Lululemon has a powerful brand-building strategy that doesn’t rely on celebrity athletes and media advertising. Lululemon has made partnerships with high-profile sports stars, but it primarily markets the brand at the local level, using marathons, yoga classes, and other events to spread the word.
Its growth shows how effective this has been in competing against the industry leaders. Lululemon’s revenue grew at an annualized rate of 19% over the last 10 years. Customers are willing to pay up for Lululemon’s brand, as shown by the company’s above-average profit margin of 17%, which is unusually high for an apparel business.
Lululemon grew revenue 13% year over year during the fiscal fourth quarter, while Nike reported declining sales. The higher demand for Lululemon puts it in a relatively strong position to navigate tariff headwinds. Management continues to focus on launching new products, including expanding into footwear, to drive more growth and brand consideration.
Lululemon estimates its unaided brand awareness in the U.S. market to be in the 30s percentage range, while it’s even lower overseas. By “unaided,” management is referring to the number of people who can name the brand without being prompted. This means most people can’t recall the brand when thinking about apparel, which indicates a lot of growth still ahead.
A $10,000 investment in the stock 10 years ago would be worth more than $40,000 right now, and that’s after the recent haircut in the share price. Investors can buy shares for just 19 times this year’s earnings estimate. A combination of double-digit annualized earnings growth and a higher valuation could lead to similar returns over the next 10 years.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Deckers Outdoor, Lululemon Athletica Inc., and Nike. The Motley Fool has a disclosure policy.