Buying shares of companies that own leading consumer brands when they are experiencing temporary weaknesses in sales can be a rewarding tactic. Recent quarterly reports from top apparel companies show that consumers are pulling back on their discretionary spending. But this also means investors with long time horizons can buy shares at what will likely prove to be bargain valuations.
Lululemon Athletica (LULU +1.58%) and Deckers Outdoor (DECK +0.75%) have been two of the worst-performing stocks in the S&P 500 index so far this year. But now, trading at less than 15 times forward earnings estimates, they could be smart buys.
1. Lululemon Athletica
Lululemon Athletica stock has fallen by about 53% year to date as investors reacted to its weak sales growth. But part of that was due to self-inflicted wounds that management can conceivably solve.
You have to be careful to avoid investing in value traps. These are stocks that look cheap on a price-to-earnings basis, but where the underlying business is losing its competitive edge and offers limited growth potential. However, Lululemon has built one of the strongest brands in the athletic apparel industry. Its sales growth has generally been on par with its industry peers or outpaced them, which is a clear sign of brand strength.
NASDAQ: LULU
Key Data Points
Lululemon's sales growth has been lower than expected this year; weaker consumer discretionary spending and a lack of newness in the company's product assortment were to blame. But management is addressing its inventory issues and plans to bring fresh styles to stores by spring 2026.
The retailer was posting double-digit percentage revenue growth just two years ago. The top-line gains it continues to see internationally show the brand is still strong, suggesting that the company could return to that type of overall growth in a stronger economy. Lululemon's forward (1-year) price-to-earnings (P/E) multiple is 14. Overall, this could be a solid value stock to add some balance to portfolios that are heavily weighted toward high-growth, high P/E stocks.
2. Deckers Outdoor
Deckers Outdoor has benefited from growing demand for its Ugg brand and Hoka performance footwear. The stock plummeted after its latest quarterly earnings report and is now down about 57% year to date, which presents a great buying opportunity.
As with Lululemon, there's nothing wrong with Deckers' brand. It actually beat expectations for the quarter, with sales up 9% year over year and earnings per share up 14%. However, that was slower growth than Deckers was reporting a few years ago, and management noted that U.S. consumer sentiment remains weak.
NYSE: DECK
Key Data Points
Deckers is focused on building long-term demand for its products, and it has a solid track record. Hoka was not on many people's shopping lists 10 years ago, but it has grown into a top footwear brand. Hoka is also popular among non-runners for its thick-soled cushioning, which is beneficial to those with joint pain. Hoka sales were up 11% year over year last quarter, which was a solid result in a challenging sales environment.
Deckers has delivered compound annualized earnings growth of 23% over the last 10 years, which offers an indication of the type of growth this company could achieve in a stronger economy. The stock is now trading at a forward (1-year) P/E of 13, which is an absolute steal.
