Lululemon Athletica (NASDAQ: LULU) It has lost about half its valuation in the last five years. Investors have dumped the stock en masse due to multiple reasons and it is now trading at levels it hasn’t reached since 2020.
The business has faced challenges, but the brand is arguably still strong, especially among teens and young adults. Warren Buffett once said that he likes to buy companies when they are in “temporary trouble” as this can generate significant returns in the future. Are Lululemon’s problems temporary? Could this be a fantastic time to buy stocks?
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There’s really no mystery as to why Lululemon stock is tanking; It’s just not the growth stock it was in the past. The chart below shows a deeply worrying trend, with Lululemon’s growth falling in recent years, down to just under 1% in its most recent quarter.
The most crucial issue, however, is the because. The growth rate was high before 2022, when pandemic-driven spending gave it a big boost. But even in recent years it has been going down. Rising inflation is likely to have hurt its growth as consumers have turned to cheaper options. Additionally, the rise of fast fashion and the availability of comparable clothing options at online retailers in China have made it difficult for consumers to justify paying more for Lululemon brand products.
While the company still has a devoted following that is loyal to the brand, the big challenge for Lululemon is reaching a broader range of customers amid the deluge of options.
Lululemon shares currently trade at just 12 times earnings, which is a significant discount and underscores investor concerns about the business. If it can’t find a way to return to solid growth, it will be difficult to win over investors. The increase in competition is concerning, and without a clear path forward, taking a chance on Lululemon stock will come with significant risks.
The company is also looking for a new CEO after Calvin McDonald resigned earlier this year. At a minimum, you may want to wait until there is clarity on both Lululemon’s leadership position within the business and strategy going forward. For now, however, I would stay away from the stock, as it may still go down this year.