Shares of Lululemon Athletica (LULU +1.41%) have declined 55% this year due to soft consumer spending and weak sales growth. This is not unique to Lululemon, as Nike and other retail brands have experienced similar weakness in demand this year. However, the pessimism surrounding Lululemon's prospects is pronounced, as the stock is trading at a very low multiple of forward earnings estimates.
One reason that can explain Wall Street's bearish view of Lululemon is the brand's reliance on athleisure and selling apparel that is perceived as more fashion-oriented, which raises the risk that shifting style preferences could cause more variability in its annual revenue performance. This risk has materialized, but it is also providing investors with an opportunity to purchase shares at a tempting valuation.
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Is Lululemon stock a buy?
Lululemon attributed the primary cause of its recent deceleration in revenue growth, which slipped to 6.5% year over year in the fiscal second quarter, to a stale assortment that lacks newness in specific categories, such as lounge and social.
On the brighter side, it remains a positive signal for the company's long-term prospects that it continues to grow sales, particularly abroad. International expansion remains robust, with revenue growing at double-digit rates.
Management is making changes to its assortment to bring a better balance between new and core styles. However, it may take at least a few quarters for these improvements to improve sales growth.
NASDAQ: LULU
Key Data Points
Lululemon's full-year guidance calls for revenue growth of between 3% and 4%, which implies further deceleration in the holiday quarter. Earnings per share are also expected to decline by about 12% this year to between $12.77 and $12.97.
The stock is already pricing in pessimistic long-term growth assumptions, with the forward price-to-earnings multiple hovering at around 13. If consumer spending picks up in the next year and management's inventory adjustments are successful, the stock could rebound sharply in 2026.
