What happened
Week to date, shares of Lululemon Athletica (LULU) were down 10.9% as of 9:58 a.m. ET on Friday, according to data provided by S&P Global Market Intelligence. There was no company-specific news to explain the decline, but the pattern was consistent with the poor performance of other retail stocks this week. The sector has been sinking since Tuesday, when Walmart released disappointing earnings results.
Over the last month, Lululemon's stock price has fallen 33%, underperforming the 20.3% decline in the SPDR S&P Retail ETF.
LULU Total Return Level data by YCharts
So what
Investors are getting more concerned about supply chain issues and their potential impact on Lululemon's bottom line in the coming quarters. Although Lululemon has delivered better-than-expected earnings results over the last four quarters, the recent earnings miss by Walmart shows that cost inflation is getting worse. Investors are bracing for weak results from Lululemon when it reports fiscal first-quarter earnings on June 2.
For its part, Lululemon serves the sweet spot of retail. Athletic wear has been one of the most consistently growing apparel categories for several years. Between 2017 and 2019, activewear sales grew at an annualized rate of 8% per year compared to just 1.2% for the overall apparel industry, according to NPD Group.
Image source: Getty Images.
Now what
Lululemon's revenue has more than doubled over the last five years, but the stock entered 2022 trading at a high price-to-earnings ratio of 59. High valuations imply high growth expectations, so when investors begin to worry that a recession might occur and cause growth to stall, they're usually quick to sell high P/E stocks.
But as its valuation comes back down, investors should keep Lululemon stock on their buy lists. In April, management updated its five-year growth target and forecast that revenue would double again by 2026. Stocks can do unpredictable things in the short term, but over many years, there is a high correlation between how a company performs and the returns its shareholders accrue. That's why this growing athletic apparel company is a stock worth considering.
