Lululemon Athletica (LULU +2.12%) has been one of the best-performing apparel stocks on the market over this century. Since its 2007 IPO, the stock, which is best known for pioneering the athleisure category, has jumped 1,090%. Those gains were much more impressive before the stock tumbled this year, though.
Year-to-date through Nov. 19, the stock was down 57%, making it one of the worst performers in the S&P 500 (^GSPC +0.98%) this year.
Like other apparel companies and much of the discretionary goods sector, including Deckers, Nike, Target, and Chipotle, Lululemon is seeing a pullback in demand as sales in its core North American market have essentially flatlined. In the second quarter, comparable sales fell 4% in the Americas, and revenue in the region was up just 1%.
In addition to the macroeconomic headwinds, management also acknowledged its own lack of execution as it failed to keep product fresh and in stock in specific categories, leading to weaker sales.
It was also forced to slash its guidance for the year due to the loss of the de minimis exemption, which had allowed shipments of less than $800 to be imported into the U.S. without paying tariffs.
As a result of those setbacks, the stock has dropped sharply, but is this a buying opportunity or a sign of things to come? Let's take a look at three things you should know before buying Lululemon stock.
Image source: Getty Images.
1. Management is changing strategy
CEO Calvin McDonald acknowledged the challenges the company is facing, as well as its own errors. He said, "Our lounge and social product offerings have become stale and have not been resonating with guests," and that the company relied on the same product playbook in certain categories for too long.
In order to fix these problems, the company plans to speed up its go-to-market process to test new styles, increasing the number and frequency of new styles. Specifically, it's aiming to increase the percentage of new styles in its assortment from 23% to 35% by next spring, and will measure customer behavior to the change and respond accordingly.
Additionally, the company has improved its fast-track design capabilities, reducing lead times by several months for some products, and expects those to begin to have an impact starting early next year.
It's too soon to say if that's enough to turn Lululemon's performance, but investors should be encouraged by management's diagnosis and its quick action.
2. International growth is still strong
While Lululemon is clearly struggling in its core market, it is finding success elsewhere. In its international segment, comparable sales rose 15%, driving revenue up 22%. Its performance was particularly strong in China, which has become its second-largest market outside of North America.
Comparable sales in China jumped 17% in the second quarter, and revenue rose 25%.
Lululemon has followed in the footsteps of other Western brands, including Nike, Apple, and Starbucks, that have had success in a market known for conspicuous consumption, and it sees a long runway of growth in China.
It opened five new stores in China in the second quarter, and more than half of its international store openings this year will be in China. It is also a promising opportunity in Mexico, where Lululemon has opened 18 locations over the last four quarters.
NASDAQ: LULU
Key Data Points
3. The valuation is attractive
Following the sell-off this year, Lululemon's price-to-earnings valuation is the lowest it's ever been, with the possible exception of the great financial crisis, as it now trades at a P/E of just 11.3.
That's a valuation that indicates that investors expect the stock to only have low-single-digit growth from here on out. However, despite its recent struggles, Lululemon is still very much a growth company, opening new stores both in North America and abroad, and benefiting from the continuing growth of the category it invented, athleisure.
It's possible that the consumer slump could weaken and send Lululemon stock even lower, but it looks more likely than not that the apparel retailer will come out of the other side a stronger, faster-growing company, especially if its style refresh pays off.
Investors have an opportunity to get a piece of the growth stock for a bargain price.
