Lululemon Athletica (LULU 2.17%) shares are down about 10% year to date as of this writing, extending a rough stretch for the stock as investors grapple with tariffs, a CEO change, and disappointing sales in the U.S.
Combining the stock's slide this year with its pullback of approximately 46% last year, the stock is now down about 51% since the beginning of last year. Is this a good time to buy the stock? After all, the company recently provided a positive update on its business, saying that it now expects its fourth-quarter results to come in at the high end of its guidance range.
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Two different geographical stories
On the surface, Lululemon's results look decent -- especially when compared to the stock's conservative valuation. In its most recent quarter, Lululemon's net revenue rose 7% year over year to $2.6 billion. Notably, this was in line with the company's 7% growth in the prior quarter, highlighting sequential stability in the company's overall demand trends.
But what has investors concerned is what lies underneath. In Q3, Lululemon's Americas net revenue fell 2% year over year, while international net revenue rose 33%. And the decline in its Americas segment is even more pronounced when looking at comparable sales trends. The key metric, which measures year-over-year sales trends at stores that have been open for more than a year and e-commerce sales, declined 5% year over year in Americas.
With Americas accounting for 68% of Lululemon's third-quarter revenue, it makes sense that investors are concerned about this core market's weakness.
Adding to the problem, the U.S. -- Lululemon's largest market -- has been even weaker than the broader Americas segment. Management said in its third-quarter earnings call that U.S. revenue fell 3% year over year during the period.
Also an issue, Lululemon's third-quarter gross margin contracted 290 basis points to 55.6% as the company navigated tariffs and markdowns.
But there has been some good news recently, too.
In a recent press release, Lululemon said it now expects both revenue and earnings per share for the quarter to come in at the high end of its prior guidance ranges.
But it's worthing noting that this guidance wasn't very exciting in the first place. When adjusting for the extra week in the year-ago period, management's recently revised guidance implies top-line sales growth of just 3% to 4% -- a significant deceleration from 7% growth in Q3.
Is Lululemon stock a buy now?
The question, however, is whether the stock's valuation is low enough to price in Lululemon's troubles.
I think it is.
NASDAQ: LULU
Key Data Points
As of this writing, the stock trades at a price-to-earnings ratio of just 13. A valuation like this assumes that the company's revenue growth rate remains in the single digits, with earnings growth at a similar rate.
But it's worth highlighting that this is a global brand with impressive international momentum.
The company's 33% growth in international revenue in Q3 was fueled by 46% growth in mainland China -- a massive market. Highlighting Lululemon's momentum in the market, when it reported its third-quarter results, management said it now expects its full-year growth in the market to be above the high end of its forecast for 20% to 25% growth on a constant-dollar basis during the period (when excluding the extra week in 2024). Additionally, the company's "rest of world" segment (a subsegment of its international business) has been seeing impressive momentum, with segment revenue rising 19% year over year in Q3.
Considering the company's impressive global appeal, I think Lululemon's sell-off may be overdone. Of course, there are risks, including the possibility that the brand loses steam internationally or that the U.S. business worsens. But I believe the stock's cheap valuation does a good job of pricing in these risks.
