Lululemon (LULU +2.12%) was once a terrific stock for investors to have had in their portfolios. Shares of the athleisure pioneer were up 321% in the five-year period leading up to their peak in December 2023. The market has lost faith, though, as slower sales growth has sent shares spiraling. They currently trade 68% below that all-time high (as of Nov. 18).
This consumer discretionary stock might be a smart buy-the-dip candidate. Investors should read this before buying Lululemon.
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Lululemon's strategy focuses on the premium end of the market
The apparel industry is very competitive, with many companies fighting to attract consumer wallet share. However, Lululemon has found success by catering to the premium end of the market, with its technical fabrics. It sells to both women and men, with the latter group registering faster growth in recent years. In 2022, the business started selling footwear.
Lululemon possesses pricing power. Its brand is viewed positively by consumers, who are willing to pay up for what they believe are high-quality products. The company's gross margin has averaged an outstanding 57.6% in the past five years. This is better than industry heavyweight Nike.
Sales growth has slowed, especially in the U.S.
Not long ago, it was normal to see Lululemon post greater than 20% year-over-year revenue gains. The investment community certainly loves a good growth story, and this business was precisely that. But the data recently has made it easy to be less optimistic.
In fiscal 2024 (ended Feb. 2), Lululemon reported a 10% revenue increase. And through the first two fiscal quarters of 2025, sales were up by just 7%. These represent huge slowdowns from prior years.
The U.S. remains a troubled market, where sales were flat compared to Q2 2024. China is a bright spot. Revenue there climbed 25%, showcasing strong demand. Lululemon continues to aggressively open new stores in the Asian nation.
NASDAQ: LULU
Key Data Points
This consumer discretionary stock trades at a bargain valuation
In the past five years, the S&P 500 (^GSPC +0.98%) would have doubled an investor's starting capital. Lululemon, on the other hand, is down a worrying 51%. The market has clearly soured on the company.
The pessimism might not be warranted. Lululemon is still growing revenue. It remains extremely profitable, and the brand still resonates with consumers.
Contrarian investors might be inclined to take a chance on the stock. It's dirt cheap right now, trading at a price-to-earnings ratio of only 11.2. Should the business start to report improving financial results, the market could rerate shares higher, adding more upside to the mix.
