The world of apparel is ever changing. Lululemon Athletica (LULU 1.80%) is feeling the brunt of a recent consumer change, as shoppers flock to competing retail brands and spend less on athleisure than during the heart of the pandemic. Shares of the well-known apparel giant are down 54% from all-time highs even though the market is soaring, and the stock is trading at its lowest price-to-earnings ratio (P/E) in years. Investors are also concerned about how tariffs will affect profitability.
And yet, the company keeps making new highs in revenue and earnings and is now starting to aggressively return capital to shareholders with the stock at a depressed price. Does this beaten-down stock price mean Lululemon is a millionaire-maker for your portfolio today? Let's allow the numbers to tell the story.
NASDAQ: LULU
Key Data Points
New crop of competitors, plus tariffs
Lululemon has been a huge winner in the athleisure space over the last decade. Its leggings, tops, and jackets became hugely popular with female shoppers in North America, causing revenue to go from under $3 billion 10 years ago to almost $11 billion over the last 12 months. In recent years, Lululemon has successfully expanded into men's athleisure and international markets.
If revenue keeps growing, then why is the stock down? Seeing Lululemon's success, a lot of copycats have begun to spring up, such as Alo Yoga, Vuori, and Athleta. Using the power of social media influencers and venture capital backing, these brands have aggressively tried to step on Lululemon's turf. Nike has also tried to gain some of Lululemon's shoppers. The narrative around these competitors is strong, but the underlying numbers don't show a huge threat. Lululemon's North America revenue grew 4% year over year on a constant currency basis compared to a 7% fall for Nike. We don't have figures for many of these upstart brands, but Athleta saw a 6% revenue fall in the same period.
Summing it up, Lululemon looks to be doing just fine fending off the competition, even in a consumer spending environment that is tough for apparel in North America. Tariffs will impact the business as they currently stand, and this is something Lululemon will have to deal with. However, it is only expecting a small impact on its profit margins unless tariff rates greatly increase on its imports. With a 23% operating margin, Lululemon will still be able to generate a healthy profit with these new tariffs.
Images source: Getty Images.
Fast growth in China despite a consumer recession
The most impressive part of Lululemon's business today is its strong growth in China. After a housing property bust in the Asian economy in 2021, consumer spending dropped, which has been a headwind to apparel companies. Despite this, Lululemon is growing quickly in the country, with China mainland revenue up 22% year over year in constant currency last quarter.
China now generates $1.6 billion in annual revenue for Lululemon, with the brand just scratching the surface in the market with over 1 billion people. If consumer spending recovers, revenue growth may accelerate for Lululemon in China, making up for any weakness in North America. Other geographies like the rest of Asia and Europe only generate $1.1 billion in annual sales but are growing quickly as well, giving Lululemon even more room to expand its brand internationally if the North American market is near saturation.
This is the big growth driver investors need to watch in the years to come.
LULU PE Ratio data by YCharts.
Is Lululemon a millionaire maker?
With Lululemon stock dipping so much in the last year, its earnings ratio has fallen quite aggressively. The trailing P/E ratio now sits at 16, which is close to its lowest level in the last decade and much lower than the market average.
To take advantage of this falling stock price, management is starting to increase its share repurchases. It spent $430.4 million on share repurchases just last quarter, which is about 1.5% of its current market cap. Buying back so much stock so quickly can reduce Lululemon's shares outstanding, thereby increasing earnings per share (EPS) and free cash flow per share, the twin drivers of stock price gains over the long haul.
Lululemon looks like a cheap stock to buy right now. If sales keep growing despite the tariff turmoil, the stock could handsomely reward investors in the long run, particularly if the company keeps repurchasing stock at a low P/E ratio. However, investors should understand that the apparel industry is finicky; styles can come and go quickly with no rhyme or reason, and so it's difficult to call Lululemon stock a millionaire maker. Despite this, I think Lululemon is a great stock to buy and hold for investors today.
