It's been a tough 2024 for investors in Lululemon Athletica (LULU 1.76%) as its share price is down nearly 50%. The biggest part of the slide began after a disappointing earnings report came out in early April. After its second-quarter report was released last week showing so-so results and a cut in its full-year guidance, investors had more reason to wonder.
The latest financial report kept investors guessing. Is more bad news coming? Or is the worst now over for the stock?
Let's take a closer look at the data to see whether Lululemon is ready to stage a turnaround.
NASDAQ: LULU
Key Data Points
Sales and margins remain strong
In the second quarter, which ended July 28, Lululemon's revenue rose 7% year over year (8% on a constant-currency basis) to $2.4 billion. Revenue for the women's segment increased by 6%, while the men's segment saw sales jump 11%. Accessory sales rose 7% year over year. Breaking the numbers down by region, revenue in the Americas edged up 1% year over year (2% on a constant-currency basis) while international sales jumped 29% (31% on a constant-currency basis). U.S. revenue was flat, while mainland China sales soared 34% (37% on a constant-currency basis).
Same-store sales rose 2% in the quarter. International same-store sales jumped 19%, while in the Americas region, same-store sales fell by 3%. In China, same-store sales rose 21%.
On the earnings call, CEO Calvin McDonald told analysts that much of what hurt Lululemon's showing in the quarter was a lack of newness in its offerings in terms of updated colors, prints, patterns, and silhouettes in its women's lines. He said that this was particularly true for bottoms, and noted that in areas where the company did have more newness, it didn't have enough inventory to meet demand.
Management also addressed the failed launch of its Breezethrough leggings, which were aimed at hot yoga enthusiasts. While the fabric was fine, customers disliked the fit and cut of the clothes, and management ended up pulling the products from shelves shortly after the line was introduced. Management stressed that the company's overall investment in this offering had been small and had no material impact on its fiscal Q2 results. Lululemon plans to take what it learned from this misstep and relaunch an updated Breezethrough line later.
Image source: Getty Images
Lululemon's gross margin improved by 80 basis points to 59.6%, while its product margin climbed 130 basis points. When looking at retailers and apparel companies, product margin is an important metric for investors to follow as it is an indication of how much a company's products are being sold at full price versus being discounted. Lululemon ended the quarter with 721 stores, up from 711 at its start. It had 672 stores at the end of fiscal Q2 last year.
Inventory levels are another important metric to watch when it comes to apparel companies. If inventory starts to build without a big increase in store count, it could mean that increased discounting will be necessary in the future to get rid of older inventory. On that front, the athleisure company's inventory fell 14% in the quarter despite an increase in store count, showing that it is keeping inventory lean. However, it said it expects to boost inventory by a mid-teens percentage in fiscal Q3.
Looking ahead, Lululemon management forecast fiscal third-quarter revenue would grow by 6% to 7% year over year to between $2.34 billion and $2.365 billion with adjusted earnings per share EPS of between $2.68 and $2.73. Before the report, analysts had been forecasting revenue growth of around 9% for the quarter.
For the full fiscal year, the company cut its sales and earnings guidance:
| Metric | Prior Annual Guidance | New Annual Guidance |
|---|---|---|
| Revenue growth |
11% to 12% |
8% to 9% |
| Adjusted earnings per share |
$14.27 to $14.47 |
$13.95 to $14.15 |
Source: Lululemon.
Time to buy the dip?
The fear for investors looking at Lululemon is that the company is losing some of its brand power, hurt both by competitors and changing fashion trends. Its recently weak U.S. same-store sales and guidance, as well as the issues with its women's business, certainly feed into this narrative.
That said, I don't think there is enough evidence to support the assertion that Lululemon is facing brand issues. Its gross margin and inventory are both in solid shape, which indicates that the company hasn't needed to do more discounting than usual.
For me, it looks like the apparel brand made some fashion missteps in terms of colors and styles, which is something quite easily fixed. Anecdotally, I know my daughter was looking for a Lululemon item in a certain color recently that sold out quickly -- her experience corroborates last week's commentary from the company.
With its stock price down by half this year, Lululemon now trades at a forward price-to-earnings (P/E) ratio of 17 based on analysts' consensus estimates for next year. That's cheap from a historical perspective, and also a lot less than the ratio of Nike, which is struggling as well.
LULU PE Ratio (Forward 1y) data by YCharts.
Given its recent strong international growth and the amount of expansion potential it has in its overseas markets, I think Lululemon stock looks attractively valued at current prices. I also expect that it will be able to straighten out its U.S. women's business. The company has run into issues in the past (remember the see-through leggings problem in 2013?) and was able to bounce back.
Popular brands tend to have lasting power. As such, I think the worst is now over for this stock. With the bar now reset lower, I'd be a buyer at current levels.
