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lululemon (LULU) Trades Near 52-Week Low: Should You Buy, Hold, or Sell?
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lululemon athletica inc. (LULU - Free Report) has displayed a choppy graph in recent months, operating against a backdrop of curtailed consumer discretionary spending, owing to rising inflation and higher interest rates. Additionally, the company's strong presence in the mature North America market and recent inventory challenges have contributed to a decrease in its share price. As a result, this Vancouver-based retailer of luxury athletic apparel, footwear and accessories hit a new 52-week low of $226.01 on Aug 5, 2024.
Currently trading at $233.44, the stock rebounded 3.3% from its 52-week low. However, it still reflects a significant 54.8% discount from its 52-week high of $516.39.
Notably, the lululemon stock has rolled down as much as 54.4% in the year-to-date period compared with a 30.6% drop in the broader industry and a 6.6% decline in the Consumer Discretionary sector. In contrast, the S&P 500 has gained 10% during the same period.
Image Source: Zacks Investment Research
Rolling down more than 50% year to date, the stock has recorded a significant 39% decline in the past year and has tanked 42.7% in three years. However, shares of lululemon have registered 27.7% growth in the past five years.
Moreover, LULU is trading below its 50 and 200-day moving averages, indicating a bearish outlook and challenges in sustaining the recent performance levels.
lululemon’s Stock Trades Below 50 and 200-Day Moving Average
Image Source: Zacks Investment Research
Valuation
Despite the downside, lululemon is currently trading at a forward 12-month P/E multiple of 15.55X, exceeding the industry average of 11.15X. The stock trades at a discount to its rival NIKE’s (NKE - Free Report) current forward 12-month P/E of 22.72X.
The premium valuation suggests that investors have strong expectations for lululemon’s future performance and growth potential. However, the stock currently seems somewhat overvalued. As a result, investors might be hesitant to buy at these elevated levels and may prefer to wait for a more favorable entry point.
Image Source: Zacks Investment Research
Decoding Challenges Faced by LULU
lululemon is facing several significant challenges. The ongoing rise in inflation and higher interest rates are impacting consumer spending, particularly on discretionary items, making consumers more selective with their purchases. This has been a major challenge for luxury retail brands, especially in the Americas.
Revenue growth for lululemon’s Americas business slowed to 3% in the first quarter of fiscal 2024 compared with 17% growth recorded in the previous year. This slowdown reflects broader unfavorable trends in the North America market, exacerbated by the inflationary environment.
The inflationary environment in North America has also impacted the performance of LULU's competitors, such as Columbia Sportswear (COLM - Free Report) and Ralph Lauren Corp. (RL - Free Report) .
Apart from this, the company’s slowing revenue growth in North America was attributed to the soft performance of the women’s category. In the said category, the company dealt with inventory shortages in key product lines, including popular bag designs, and essential apparel sizes and colors, particularly in the United States. lululemon is working to resolve these issues and expects to replenish inventory by the second half of fiscal 2024.
Consequently, the company reported a 10% year-over-year increase in revenues for the first quarter of fiscal 2024, a sharp decline from 24% growth seen in the year-ago period. This slowdown contrasts sharply with the company’s typical double-digit growth trend.
Given these challenges, lululemon has provided a cautious forecast for second-quarter fiscal 2024, projecting year-over-year revenue growth of 9-10%, which underscores the uncertainties that the company is facing.
How is lululemon Positioned Amid These Challenges?
LULU is seeing gains from its Power of Three X2 growth strategy. The plan forecasts net revenues of $12.5 billion by 2026, double the $6.25 billion reported in 2021. Additionally, the company’s long-term strategy emphasizes expanding its footprint in the underpenetrated international markets and increasing its share in the men’s category.
In the fiscal first quarter, international revenues increased 35% year over year, making up approximately 25% of the company’s total revenues. The international segment has been steadily contributing a larger share of overall revenues each quarter.
lululemon is particularly optimistic about its expanding presence in international markets, especially China, which offers substantial growth potential. The company aims to quadruple its international revenues over the long term and expects international sales to represent nearly 50% of its total revenues. In fiscal 2024, lululemon plans to open 35-40 net new stores, including 5-10 in North America and the rest in international markets, with a focus on Mainland China.
The company saw robust market share gains in men’s apparel in the fiscal first quarter, with revenues for the global men's category rising 15% year over year. This growth reflects sustained momentum, driven by favorable customer responses to innovations in performance wear, loungewear and the ABC franchise. The company observed that with unaided brand awareness still under 20% in the United States, there is a considerable opportunity for further expansion in the men’s category.
In addition to its physical retail operations, lululemon is harnessing its digital capabilities to boost sales and enhance customer engagement. The company is positioned as a compelling investment opportunity, thanks to its growth potential, expanding global presence and strong brand recognition across various markets.
LULU has firmly positioned itself as a premium brand in the sportswear market. This elevated status plays a key role in driving the company’s strong profitability. Despite the slowdown in revenue growth, the company has sustained strong gross and operating margins of 57.7% and 19.6%, respectively, in the first quarter of fiscal 2024.
The company’s improved margins are largely due to its ability to command strong pricing in different market conditions. Moreover, Lululemon earns revenues through company-operated stores and e-commerce sites, avoiding dependence on third-party retailers. This premium positioning and direct control over sales channels enable the company to manage its pricing strategies effectively. Consequently, LULU can efficiently translate revenues into profit through its well-executed pricing policies.
lululemon’s earnings potential is well-reflected by its forward guidance, which predicts second-quarter fiscal 2024 EPS of $2.92-$2.97, suggesting a rise from the $2.68 reported in the prior-year quarter. For fiscal 2024, LULU anticipates an EPS of $14.27-$14.47, an increase from the $12.77 reported in fiscal 2023.
Upward Estimate Trajectory
The Zacks Consensus Estimate for LULU’s fiscal 2024 and 2025 EPS has risen 0.4% each in the past seven days. The upward revision in earnings estimates indicates analysts’ increasing confidence in the stock.
For fiscal 2024, the Zacks Consensus Estimate for LULU’s sales and EPS implies 11.8% year-over-year growth each. The consensus mark for fiscal 2025 sales and earnings indicates 9.5% and 10% year-over-year growth, respectively.
Image Source: Zacks Investment Research
What Should be Your Approach?
Investors face a pivotal question regarding lululemon’s investment decision. Despite the company's Power of Three X2 growth strategy, significant international expansion plans and strong performance in the men’s category, the stock remains in a tough spot. The company is navigating a challenging landscape, marked by rising inflation and interest rates, and the slowdown in North America revenue growth.
With a cautious but positive forecast for the upcoming quarters, LULU continues to present a compelling investment opportunity for long-term investors, bolstered by its strong profitability and expanding global footprint. However, the company’s premium valuation may make some investors hesitant, indicating a potentially higher risk at the current price levels. For those already invested, it may be wise to hold onto the stock given its strong long-term potential.
Image: Bigstock
lululemon (LULU) Trades Near 52-Week Low: Should You Buy, Hold, or Sell?
lululemon athletica inc. (LULU - Free Report) has displayed a choppy graph in recent months, operating against a backdrop of curtailed consumer discretionary spending, owing to rising inflation and higher interest rates. Additionally, the company's strong presence in the mature North America market and recent inventory challenges have contributed to a decrease in its share price. As a result, this Vancouver-based retailer of luxury athletic apparel, footwear and accessories hit a new 52-week low of $226.01 on Aug 5, 2024.
Currently trading at $233.44, the stock rebounded 3.3% from its 52-week low. However, it still reflects a significant 54.8% discount from its 52-week high of $516.39.
Notably, the lululemon stock has rolled down as much as 54.4% in the year-to-date period compared with a 30.6% drop in the broader industry and a 6.6% decline in the Consumer Discretionary sector. In contrast, the S&P 500 has gained 10% during the same period.
Image Source: Zacks Investment Research
Rolling down more than 50% year to date, the stock has recorded a significant 39% decline in the past year and has tanked 42.7% in three years. However, shares of lululemon have registered 27.7% growth in the past five years.
Moreover, LULU is trading below its 50 and 200-day moving averages, indicating a bearish outlook and challenges in sustaining the recent performance levels.
lululemon’s Stock Trades Below 50 and 200-Day Moving Average
Image Source: Zacks Investment Research
Valuation
Despite the downside, lululemon is currently trading at a forward 12-month P/E multiple of 15.55X, exceeding the industry average of 11.15X. The stock trades at a discount to its rival NIKE’s (NKE - Free Report) current forward 12-month P/E of 22.72X.
The premium valuation suggests that investors have strong expectations for lululemon’s future performance and growth potential. However, the stock currently seems somewhat overvalued. As a result, investors might be hesitant to buy at these elevated levels and may prefer to wait for a more favorable entry point.
Image Source: Zacks Investment Research
Decoding Challenges Faced by LULU
lululemon is facing several significant challenges. The ongoing rise in inflation and higher interest rates are impacting consumer spending, particularly on discretionary items, making consumers more selective with their purchases. This has been a major challenge for luxury retail brands, especially in the Americas.
Revenue growth for lululemon’s Americas business slowed to 3% in the first quarter of fiscal 2024 compared with 17% growth recorded in the previous year. This slowdown reflects broader unfavorable trends in the North America market, exacerbated by the inflationary environment.
The inflationary environment in North America has also impacted the performance of LULU's competitors, such as Columbia Sportswear (COLM - Free Report) and Ralph Lauren Corp. (RL - Free Report) .
Apart from this, the company’s slowing revenue growth in North America was attributed to the soft performance of the women’s category. In the said category, the company dealt with inventory shortages in key product lines, including popular bag designs, and essential apparel sizes and colors, particularly in the United States. lululemon is working to resolve these issues and expects to replenish inventory by the second half of fiscal 2024.
Consequently, the company reported a 10% year-over-year increase in revenues for the first quarter of fiscal 2024, a sharp decline from 24% growth seen in the year-ago period. This slowdown contrasts sharply with the company’s typical double-digit growth trend.
Given these challenges, lululemon has provided a cautious forecast for second-quarter fiscal 2024, projecting year-over-year revenue growth of 9-10%, which underscores the uncertainties that the company is facing.
How is lululemon Positioned Amid These Challenges?
LULU is seeing gains from its Power of Three X2 growth strategy. The plan forecasts net revenues of $12.5 billion by 2026, double the $6.25 billion reported in 2021. Additionally, the company’s long-term strategy emphasizes expanding its footprint in the underpenetrated international markets and increasing its share in the men’s category.
In the fiscal first quarter, international revenues increased 35% year over year, making up approximately 25% of the company’s total revenues. The international segment has been steadily contributing a larger share of overall revenues each quarter.
lululemon is particularly optimistic about its expanding presence in international markets, especially China, which offers substantial growth potential. The company aims to quadruple its international revenues over the long term and expects international sales to represent nearly 50% of its total revenues. In fiscal 2024, lululemon plans to open 35-40 net new stores, including 5-10 in North America and the rest in international markets, with a focus on Mainland China.
The company saw robust market share gains in men’s apparel in the fiscal first quarter, with revenues for the global men's category rising 15% year over year. This growth reflects sustained momentum, driven by favorable customer responses to innovations in performance wear, loungewear and the ABC franchise. The company observed that with unaided brand awareness still under 20% in the United States, there is a considerable opportunity for further expansion in the men’s category.
In addition to its physical retail operations, lululemon is harnessing its digital capabilities to boost sales and enhance customer engagement. The company is positioned as a compelling investment opportunity, thanks to its growth potential, expanding global presence and strong brand recognition across various markets.
LULU has firmly positioned itself as a premium brand in the sportswear market. This elevated status plays a key role in driving the company’s strong profitability. Despite the slowdown in revenue growth, the company has sustained strong gross and operating margins of 57.7% and 19.6%, respectively, in the first quarter of fiscal 2024.
The company’s improved margins are largely due to its ability to command strong pricing in different market conditions. Moreover, Lululemon earns revenues through company-operated stores and e-commerce sites, avoiding dependence on third-party retailers. This premium positioning and direct control over sales channels enable the company to manage its pricing strategies effectively. Consequently, LULU can efficiently translate revenues into profit through its well-executed pricing policies.
lululemon’s earnings potential is well-reflected by its forward guidance, which predicts second-quarter fiscal 2024 EPS of $2.92-$2.97, suggesting a rise from the $2.68 reported in the prior-year quarter. For fiscal 2024, LULU anticipates an EPS of $14.27-$14.47, an increase from the $12.77 reported in fiscal 2023.
Upward Estimate Trajectory
The Zacks Consensus Estimate for LULU’s fiscal 2024 and 2025 EPS has risen 0.4% each in the past seven days. The upward revision in earnings estimates indicates analysts’ increasing confidence in the stock.
For fiscal 2024, the Zacks Consensus Estimate for LULU’s sales and EPS implies 11.8% year-over-year growth each. The consensus mark for fiscal 2025 sales and earnings indicates 9.5% and 10% year-over-year growth, respectively.
Image Source: Zacks Investment Research
What Should be Your Approach?
Investors face a pivotal question regarding lululemon’s investment decision. Despite the company's Power of Three X2 growth strategy, significant international expansion plans and strong performance in the men’s category, the stock remains in a tough spot. The company is navigating a challenging landscape, marked by rising inflation and interest rates, and the slowdown in North America revenue growth.
With a cautious but positive forecast for the upcoming quarters, LULU continues to present a compelling investment opportunity for long-term investors, bolstered by its strong profitability and expanding global footprint. However, the company’s premium valuation may make some investors hesitant, indicating a potentially higher risk at the current price levels. For those already invested, it may be wise to hold onto the stock given its strong long-term potential.
lululemon currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.