The stock market has roughly doubled since mid-2008, making this an unusually good time to be an investor. Many individual stocks deviated dramatically from that average performance, though.
Today, I’m taking a look at three of the biggest outperformers in the period — Sherwin Williams (NYSE: SHW), lululemon atheletica (NASDAQ: LULU), and MercadoLibre (NASDAQ: MELI) — which each grew by at least 700% over the past decade.
Finding optimism in a battered industry
Ten years ago, paint giant Sherwin Williams announced a rare annual sales slump and a sharp drop in net income as its industry suffered from the effects of double-digit declines in new home construction and existing home turnover. Worse yet, as the recession spread from the U.S. into global markets, management’s outlook turned bleaker. “We believe that the weak demand for paint and coatings … is likely to continue for the foreseeable future,” executives explained in their 2008 annual report.
Yet even at that time there were good reasons to remain optimistic about Sherwin Williams’ business. Cost cuts were lifting efficiency levels to new highs, for example, and the company generated almost $900 million in operating cash flow to mark its third straight year of a cash production ratio that was at least 10% of sales.
The business did end up contracting in the following year before beginning to rebound in 2010. Meanwhile, Sherwin Williams has lifted its sales base to $15 billion from less than $8 billion. Earnings in 2017 were $1.8 billion, or nearly four times the $480 million it generated a decade prior.
The resilience of brand power
In 2008, Lululemon operated just 81 locations, which generating $275 million in sales of its yoga-inspired apparel. The retailer had earned success in the Canadian market and executives were encouraged by early results in their U.S. expansion.
Management also believed an “increasing appreciation for the health benefits of yoga and related fitness activities” would support growing demand for its premium apparel products.
They were right about that long-term forecast, although the retailer would see more than its fair share of bumps along the way. Quality-control issues harmed the business in 2013, and it took several years for the company to fully recover from that brand hit.
But Lululemon has put those challenges safely behind it. Annual sales are now on pace to cross $3 billion, and profitability, which is being lifted by innovative product launches, is climbing back toward a record high of 57% of sales.
Favorable industry dynamics
E-commerce accounted for less than 4% of the broader U.S. retailing world a decade ago, and that number has soared to just under 10% today. But back in 2008, it wasn’t clear that these impressive gains would happen, especially in Latin America, which suffered from weak broadband infrastructure and challenges around shopper confidence in using credit cards for online purchasing.
MercadoLibre overcame those issues to post massive growth in the past decade, though. Its marketplace user pool rose to 212 million last year, up from 145 million two years prior, and management believes that footprint means the company has reached a “critical mass of active buyers, sellers, and product listings.”
The e-commerce giant is still firmly in growth mode, and its gross and net profit margins both fell last year as it poured investments into free shipping offerings and more aggressive marketing. But it’s clear that these initiatives are positioning MercadoLibre as a dominant force in its markets. Sales jumped 66% last year, compared to 30% in 2016.
These three winning businesses aren’t alike in most respects, but they each created leading brands in industries that ended up growing at unusually fast rates over the past decade. One key takeaway for investors here is that this combination can generate impressive returns, especially over long time periods.
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Demitrios Kalogeropoulos owns shares of Sherwin-Williams. The Motley Fool owns shares of and recommends MercadoLibre. The Motley Fool recommends Lululemon Athletica and Sherwin-Williams. The Motley Fool has a disclosure policy.