Lululemon Athletica (NASDAQ: LULU) has been one of the best-performing apparel stocks on the market this century. Since going public in 2007, the stock, best known for pioneering the athleisure category, has risen 1,090%. However, those gains were much more impressive before the stock fell this year.
Year to date through Nov. 19, the stock is down 57%, making it one of the worst performers in the S&P 500 (SNPINDEX: ^GSPC) this year.
Like other apparel companies and much of the discretionary goods sector, including Deckers, Nike, Aimand chipotleLululemon is experiencing a pullback in demand as sales in its core North American market have essentially stagnated. In the second quarter, comparable sales fell 4% in the Americas and revenue in the region increased just 1%.
In addition to macroeconomic headwinds, management also acknowledged its own lack of execution as it failed to keep products fresh and in stock in specific categories, leading to weaker sales.
It was also forced to cut its forecasts for the year due to the loss of de minimis exemption, which had allowed shipments of less than $800 to be imported into the United States without paying tariffs.
As a result of those setbacks, the stock has fallen sharply, but is this a buying opportunity or a sign of things to come? Let’s take a look at three things you should know before buying Lululemon stock.
Image source: Getty Images.
CEO Calvin McDonald acknowledged the challenges the company faces, as well as his own mistakes. He said, “Our social and lounge product offerings have become stale and have not resonated with guests,” and that the company relied on the same product playbook in certain categories for too long.
To solve these problems, the company plans to accelerate its marketing process to test new styles, increasing the number and frequency of new styles. Specifically, its goal is to increase the percentage of new styles in its assortment from 23% to 35% by next spring, it will measure customer behavior toward the change and respond accordingly.
Additionally, the company has improved its rapid design capabilities, reducing lead times by several months for some products, and expects them to begin to have an impact starting early next year.
It’s too early to say whether that’s enough to improve Lululemon’s performance, but investors should be encouraged by management’s diagnosis and its quick action.
While Lululemon is clearly struggling in its core market, it is finding success elsewhere. In its international segment, comparable sales increased 15%, boosting revenue 22%. Its performance was particularly strong in China, which has become its second-largest market outside North America.
Comparable sales in China increased 17% in the second quarter and revenue increased 25%.
Lululemon has followed in the footsteps of other Western brands, including Nike, Appleand starbuckswhich have found success in a market known for its conspicuous consumption, and sees a long runway for growth in China.
It opened five new stores in China in the second quarter and more than half of this year’s international store openings will be in China. It’s also a promising opportunity in Mexico, where Lululemon has opened 18 locations in the last four quarters.
Following this year’s sell-off, Lululemon’s price-to-earnings valuation is the lowest in its history, with the possible exception of the Great Financial Crisis, as it now trades at a P/E of just 11.3.
That’s a valuation that indicates investors expect the stock to see only low-single-digit growth going forward. However, despite its recent difficulties, Lululemon is still very much a growing company, opening new stores both in North America and abroad and benefiting from the continued growth of the category it invented, athleisure.
It’s possible that the consumer slump could weaken and send Lululemon stock even lower, but it seems more likely that the clothing retailer will come out on the other side as a stronger, faster-growing company, especially if its style upgrade pays off.
Investors have the opportunity to get a piece of growth stocks at a bargain price.
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Jeremy Bowman has positions at Chipotle Mexican Grill, Lululemon Athletica Inc., Nike, Starbucks and Target. The Motley Fool ranks and recommends Apple, Chipotle Mexican Grill, Deckers Outdoor, Lululemon Athletica Inc., Nike, Starbucks and Target. The Motley Fool recommends the following options: Short December 2025 calls for $45 at Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
What You Should Know Before Buying Lululemon Stock was originally published by The Motley Fool
