Key Points
Lululemon Athletica has a growing international presence, a loyal customer base, and superior sales performance to its competitors.
RH is not just a furniture store. It's a lifestyle brand catering to high-income customers and should benefit from a rebound in the housing market.
The tech-driven bull market has overshadowed hidden gems in other sectors, most notably consumer discretionary companies. Investors who are looking for value can find compelling opportunities among top retail brands.
Here are two retail stocks with solid growth prospects that are trading well off their highs.
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1. Lululemon Athletica
Shares of Lululemon Athletica (NASDAQ: LULU) have fallen sharply this year over a weakening sales trend. Other retail brands have also experienced mixed sales results, which suggests a broader shift in consumer behavior that doesn't reflect poorly on Lululemon's brand.
For investors looking for value, Lululemon might fit the bill. The shares trade at a forward price-to-earnings multiple of 13, and this is for a brand that has been growing faster than the top dog in the industry, Nike.
Lululemon has 30 million customers in its membership program -- a solid base of customers to market new styles. Over the last six years, Lululemon has tripled its sales. It now operates 784 stores worldwide, employing 39,000 people.
Most of the sales weakness this year is isolated to the U.S. market. Internationally, Lululemon's brand is going strong, with sales in China expected to grow 20% to 25% next quarter, with its rest of world segment expected to be up about 20%. I believe the stock is undervalued and could deliver excellent returns over the next few years.
2. RH (Restoration Hardware)
With the Federal Reserve starting to enter a period of easing monetary policy by lowering interest rates, buying shares of stocks that could benefit from a rebound in the housing market could be a rewarding strategy for 2026.
RH (NYSE: RH) caters to higher-income clients. It's technically a furniture store, but RH is more than that -- it's a lifestyle brand. The evidence of that is seen in its expansion into hospitality, such as RH Guesthouses, in addition to yachts, private jets, and fine dining.
Despite disruptions from tariffs and a weak housing market, revenue grew 8.4% year over year in the second quarter. Importantly, demand grew 21% on a two-year basis, outpacing competition and helping RH gain market share.
RH has shown it can expand beyond metropolitan markets into less populated areas and still drive demand. RH England's remote gallery located in the countryside drove a 76% increase in demand in Q2 and generated $46 million of demand in its second full year of operation.
RH should report stronger growth when the housing market rebounds. The stock is trading at a fair forward P/E of 20, but the shares are down 75% from their previous peak and could be significantly underappreciating the company's future growth opportunity.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. and Nike. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.