Short-term returns can quickly turn negative for any stock, but this is especially true for one that had been soaring before bad news came to light. That's the tough situation that Lululemon Athletica (LULU 1.31%) shareholders recently faced.
The stock had been rallying heading into its fiscal Q4 earnings report on March 21, but fell hard in the immediate wake of that announcement. Shares are now trailing the return of the wider market over the past year after having roughly doubled the S&P 500's 30% gain before that report.
There were some good reasons for the pullback, mainly tied to a weakening retail selling environment in the core U.S. market. Let's look at whether investors are overreacting to that stumble, though, and potentially making the stock a great buy for 2024 and beyond.
A tough quarter ahead
Lululemon reported solid results to start the new fiscal year. Yet, there were some signs of softening demand heading into 2024. Comparable-store sales were up 12% in Q4, which ran through late January, to mark a modest slowdown compared to the prior quarter's 14% increase.
Management said in a conference call with investors that shopper spending decelerated during the key holiday shopping season. "There has been a shift in consumer behavior of late," CEO Calvin McDonald said, "and we're navigating what has been a slower start to the year in this market."
That shift will hurt the fiscal Q1 period, executives warned, leading to growth of around 9% year over year. Investors haven't seen Lululemon expand sales at a single-digit rate since the early days of the pandemic, and so it makes sense that the stock would give back some of the market-thumping gains it generated in the past year.
Still a strong business
Sales trends will recover as the industry strengthens again, but the bigger question is whether Lululemon will face a big financial hit from the early-2024 slowdown. It entered the period with excellent momentum on this score. Gross profit margin jumped to 58% of sales last year from 55% of sales, in fact, and the operating profit margin also soared to 22% of sales from 16%.
These wins allowed earnings to nearly double to $12.20 per share, which is rare to see in the retailing world. "Our solid ... results demonstrate the strength and resilience of our omni operating model and our differentiated position in the marketplace," CFO Meghan Frank said in a press release.
Wait and see?
Frank and her team said the Q1 financial results will be unusually weak. Executives project that profitability will decline along with that slowing sales performance before rebounding over the next several quarters and for the full 2024 year.
That forecast sets up a risky period ahead for shareholders as they watch for signs of a sales stabilization while bracing for a potential further slowdown. The good news is that the retailer isn't highly exposed to an industry slump. It was able to reduce inventories by 9% last quarter even as it boosted gross profit margin. That success reflects impressive pricing power in a competitive market.
Risk-averse investors might want to watch the shares from the sidelines if they're worried about the stock's short-term prospects. But Lululemon's multi-year growth plan is very much intact. It also enjoys industry-leading profitability and has a good shot at expanding on those margins over the next several years with help from new product releases and its push into additional merchandise categories.
As a result, investors should see great long-term returns from holding this growth stock following its recent pullback despite some potential volatility ahead in the rest of 2024.
