The stock market might be trading in record territory, but not all companies are feeling the love from investors. Take Lululemon (LULU -3.54%)for example. Shares of the premium athleisure brand are 57% off their highs from December 2023.
This apparel stock continues to take a beating, even though there have been times in the past when it has done a great job of rewarding shareholders. Is Lululemon still worth watching?
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Lululemon faces a new reality
After reporting 10.1% revenue growth in fiscal 2024, that gain decelerated to 7.3% in the first quarter of 2025 (ended May 4). The major red flag was the critical U.S. market, where Lululemon sales were up just 1.7%. "We continue to see a more cautious, discerning consumer," CEO Calvin McDonald said on the Q1 2025 earnings call.
With its products selling in the premium segment of the market, it makes sense that Lululemon would be more impacted in adverse economic scenarios. When times get tough and consumers are seeking out more value from their purchases, paying over $100 for a pair of leggings or a hoodie is probably not a prudent decision. This could explain Lululemon's slump.
Not only must the business navigate macro headwinds, but it's also impacted by the dynamic trade situation. Lululemon sources 40% of its products from Vietnam, so the current 20% levy on that country will certainly affect the company's financials. The leadership team cut earnings guidance for the current fiscal year. And to offset higher tariff-related costs, it will increase prices on select merchandise. That's not what consumers want.
What's more, the apparel industry is extremely competitive, featuring established players and younger rivals. And consumers face no switching costs when deciding where to spend their money. Lululemon has created a highly regarded brand, but it's difficult to predict how tastes and preferences will change in the future.
Taking an optimistic view
It's easy to get sucked into all the negativity, especially with Lululemon's stock down so much. However, it's not all bad news. In fact, Lululemon has several positive traits that investors can focus on.
This is a very profitable business. In the past five years, the company's net profit margin has averaged 14.4%. This is well ahead of industry heavyweights Nike and Adidas. Sales and demand trends will always be influenced by the ebbs and flows of the economy, but Lululemon has proven that it can operate a lucrative business model.
The company's growth is slowing, but it still has a huge opportunity outside of North America. In China, the world's second-largest economy with a middle class of hundreds of millions of people, Lululemon saw its revenue soar 21% in the latest fiscal quarter to $368 million. There is clearly a sizable runway to expand, and management is taking advantage. Most of Lululemon's new international stores in fiscal 2025 will be opened in China.
Investors should be cautious
With the market at all-time highs, investors are forgiven for getting excited about any bargain opportunities. That might be the case here with Lululemon. As of July 25, the stock trades at a price-to-earnings ratio of 14.8. Based on this popular metric, the valuation has not been cheaper in the past decade. Right now, the pessimists are driving the narrative with Lululemon.
It's hard to overlook how inexpensive the stock is. But I believe investors should be cautious. While I wouldn't buy shares today, I think it's a smart idea to keep Lululemon on your watch list. Until the business can return to stronger revenue and profit growth, it's best to stay on the sidelines.
