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Why Lululemon Athletica Stock Dropped 12% in September

By John Ballard – Oct 5, 2020 at 1:55PM

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Investors weighed the company's strong quarter with the expectations reflected in the stock's high valuation.

What happened

Shares of Lululemon Athletica (LULU 1.42%) lost 12.3% in value last month, according to data provided by S&P Global Market Intelligence.

The yoga specialist reported better-than-expected results for the fiscal second quarter, but the recent sell-off in the broader market dragged the shares down for the month. 

A woman in comfortable athletic clothes working out at home.

Image source: Getty Images.

So what

Lululemon surprised investors by reporting growth in revenue of 2% year over year. Gross margin only dipped 80 basis points to 54.2% as a result of strong sales of full-price merchandise. Non-GAAP earnings per share came in at $0.74, significantly beating the consensus analyst estimate of $0.55. 

Lululemon is in the sweet spot of the apparel industry right now, given the demand for comfortable clothing. Sales made through the e-commerce channel made up 61% of the business and contributed to the growth on the top line. 

But it's common for growth stocks to experience higher volatility when the markets fall. The S&P 500 fell 3.9% last month, but Lululemon trades at a high forward price-earnings (P/E) ratio of 80. After strong gains in recent months, it's not surprising to see the stock take a breather.   

Now what

CEO Calvin McDonald called 2020 a potential "inflection point for retail and for Lululemon." E-commerce sales surged 157% year over year on a constant-currency basis. Stellar digital sales growth is padding the bottom line since digital channels generate a much higher operating margin than physical store sales. 

Lululemon is well positioned for the online shift in retail spending expected to last beyond the pandemic. It's continuing to invest in international growth  while filling out its assortment to bring in more guests. Plus, the recent acquisition of Mirror should go a long way to building greater guest loyalty over the long term.

John Ballard owns shares of Lululemon Athletica. The Motley Fool owns shares of and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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