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Lululemon Stock Drops 9%; Is It a Buying Opportunity?

By David Butler – Sep 9, 2020 at 5:12PM

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The athletic apparel company surprised on earnings by topping estimates, but the stock is still down today.

Once again, lululemon athletica (LULU 5.38%) proved that it is a fast-growing name in athletic and athleisure wear. Even in the time of the coronavirus and a tougher retail environment, Lululemon seems to be doing better than the competition. The company reported second-quarter results on Tuesday that topped estimates. Despite the positive news, the stock was down 9% Wednesday afternoon.

Overall, the slump might have more to do with the stock being expensive. Shares currently carry a premium of 71 times last year's earnings. There's been a bit of a pullback in tech lately, and it's not a stretch to say that realism in value might shift a bit to other areas.

Lululemon's price fall seems to present a buying opportunity. I've shunned this stock before because of valuation, and missed out on a growth opportunity every time. There's no arguing at this point that within athletic apparel, Lululemon is the most strategically placed investment.

Woman working out

Image source: Getty Images.

Direct-to-consumer told the story

While second-quarter revenue of $287.2 million from company stores was down 51% year over year, direct-to-consumer (DTC) revenue increased by 155% to $554.3 million. That means that DTC has become the dominant source of income for Lululemon, accounting for 61.4% of total sales. That frees up the company to capitalize on e-commerce at a time when its brick-and-mortar operations are being hampered.

Lululemon's earnings declined on an unadjusted basis to $0.66 per share versus $0.96 a year ago. But with the pandemic, reduced earnings can be forgiven (or at least understood). Lululemon remained profitable at a time when many retail businesses faced a pretty dire situation. That was made clear in its early year profitability in relation to Nike's losses through early 2020.

The growth of DTC and its track record of strong sales make Lululemon appealing despite the weakened earnings over the short run. 

Looking ahead

In the second-quarter earnings release, management expressed a relatively positive outlook. CEO Calvin McDonald said, "we are cautiously optimistic with regard to the second half of the year as we continue to navigate the uncertain environment." Still, Lululemon management declined to provide any clear guidance for the year, as COVID-19 continues to create an uncertain environment globally.

Overall, it's hard not to like this stock. Lululemon has a four-year track record of double-digit growth, finishing fiscal 2019 with a 21.01% overall increase in revenue. Before the coronavirus pandemic, the company finished 2019 with a 17% increase in comparable sales. With a well-managed performance thus far in 2020, it seems to me that this week's pullback is an opportunity to get the stock at a discount. This is a stock that finds real bullish strength when the company does well. Within its industry, there doesn't seem to be a real reason that Lululemon will lose its dominant spot.

David Butler has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$307.80 (5.38%) $15.70
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$88.64 (3.79%) $3.24

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