Investors looked back when they should have been looking forward.
Give credit where it’s due, Citi analyst Paul Lejuez saw that coming a mile away. He downgraded Lululemon Athletica (LULU 0.06%) in July on the problems that “the general assortment of products lacks cohesion, is not compelling/exciting for the consumer and feels disjointed”. He added that “younger brands present an additional risk for [Lululemon’s] sales and margins”.
As expected, the fitness apparel brand’s second-quarter results were crimped by a “product plan that introduced less innovation,” leading to sales that fell short of analysts’ estimates.
The company’s management team is still optimistic about the future, of course, even though it has lowered full-year revenue and earnings guidance. As CEO Calvin McDonald explained during the second quarter earnings conference call: “For 2025, we are fast-tracking many new styles in shorts, tops, and performance tracksuits.” He added that the company “will begin to see the benefits of these strategies in the coming quarters and return to our historical levels of innovation no later than the spring of 2025.”
That may well be the case.
There is an even better reason to take a swing at this ticker which is currently trading 50% below its late 2023 peak. The biggest, current reason Lululemon shares are down so much in a short period of time is about to evaporate. The stock could start to recover even before the process is fully completed, in fact, which meant it would be wiser to move sooner rather than later.
The struggle is real
The yoga and fitness apparel company has made a lot of unforced errors lately. Chief among the last quarter was the release of its Breezethrough leggings, which – in retaliation for a similar gaffe in 2013 – were pulled from the shelves due to an uncomfortable and uncomfortable fit. It’s also arguable that Lululemon has undervalued emerging rival brands like Vuori, Alo Yoga and others.
It would also be naive to ignore that even families with higher income than this brand of athletics usually feel the point of inflation. Walmartfor example, he says that most of the market share gains that have been achieved over the course of the last two years have been primarily driven by households earning more than $100,000 a year. This crowd is also looking for ways to stretch their budgets.
Image source: Getty Images.
Final result? Although Lululemon’s Q2 earnings improved 17% year-over-year to earnings per share of $3.15 (vs. analysts’ estimate of $2.93), the top line for the last quarter of $2.37 billion was down a modest 7%, falling short of the $2.4 billion expected. Worse, same-store sales growth of just 2% fell well short of the expected pace of 5.9%. His business in America was particularly weak.
There is no relief on the near horizon. Now Lululemon calls for 2024 earnings between $13.95 and $14.15 per share, down from the previous range of $14.27 and $14.47 per share. Revenue guidance has also been revised down, with the company only looking for top-line growth of 8% to 9% this year.
But despite the bleak picture, now is an ideal time to jump into a long-term stake in Lululemon stock.
A rebound in preparation for Lululemon
Not exactly a comfortable idea to swallow right now. After all, Lululemon is sticking to its 2024 guidance for a reason. Management is not yet discussing the prospect of accelerating growth during the second half of this year. The current grouping is all about what could take shape in 2025.
There’s also no denying that the lingering economic woes are finally affecting the middle class that makes up the majority of Lululemon’s target market. In addition to Walmart’s anecdotal observation, a recent survey by the National Coalition on the Real Cost of Living indicates that 65% of Americans considered to be part of the middle class say they are struggling financially right now, without end of poverty in sight.
This is against a backdrop of record credit card debt among US consumers, with delinquencies for that debt recently hitting a 13-year high. It’s the kind of environment that can drive down discretionary spending for premium yoga apparel, especially when more affordable, newer alternatives are available.
There are a couple of important details about Lululemon and its stock that the market may be overlooking right now.
The first is that – despite the new rivals and a misfire with its Breezethrough leggings – this is still the first name in the space of athleisure and women’s yoga. It broke into the forefront of innovation before, and has returned every time to maintain its first place in this business. Performance shorts, tops and tracksuits in the works for early 2025 are a credible part of the current rebound plan.
But the challenging economy now taking a bite out of middle class budgets? This is another important detail that interested investors should understand.
Shares are not valued reactively to headlines and results as they are published. They have a predictive price, reflecting the plausible future of that company. Just look at the recent history of Lululemon’s stock to see this. The shares peaked at the end of 2023, when the economic environment did not seem so bad. However, the market knew what was coming this year anyway, aggressively driving stocks lower even before troubling data began to emerge.
In a similar vein – assuming that economic growth will be picked up next year by the upcoming interest rate cuts – Lululemon shares are likely poised to start a recovery before that economic recovery becomes evident.
This might help. Despite all the recent drama and volatility, the analyst community still collectively considers this ticker to be a strong buy. It sports a consensus target price of $325.56 per share. That’s 27% above the current price of Lululemon shares.
Not for everyone, but maybe for you
It is not ideal for everyone. Although undervalued, Lululemon stock is likely to remain volatile for the foreseeable future. It could end up moving markedly lower from its current price before all is said and done.
For business growth investors who can stomach some volatility, however, half of this stock from December is a first opportunity to move into a long-term position at a very cheap price. The company’s resilience and long-term potential has never been in question, even among its recent critics.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Lululemon Athletica and Walmart. The Motley Fool has a disclosure policy.