A year ago, Lululemon Athletica (LULU 2.80%) stock traded above $300. It closed at $127.18 on May 22.
It's important to look at what a share price has done since that tells you what the market thinks about a company's prospects. In this case, investors have clearly become concerned.
But it's just a first step for long-term investors. You need to analyze Lululemon's fundamentals to determine whether investors have mispriced its stock by discounting the company's long-term growth prospects.
Image source: Getty Images.
Lacking innovation
In its heyday, Lululemon's athleisure (combined athletic and leisure wear) products became very popular among women, particularly its yoga pants. But competing products and a lack of innovative new products that caught on with consumers have hurt the company's results.
Last year's revenue increased 6% minus the effects of foreign-currency translations. While that sounds adequate, a better measure is same-store sales (comps). Comps grew just 2% in the latest fiscal year, which ended Feb. 1.
In Lululemon's core Americas market, comps dropped 3%, with management citing lower demand as one reason. Store traffic and order value both decreased.
Management's outlook for this year isn't great, either. It expects total revenue growth of just 2% to 4% and expects diluted earnings per share to drop 7% to 9%.
Waiting for the new CEO
Lululemon's results and stock price performance have drawn the ire of founder Chip Wilson, along with activist investor Elliott Management. Management and the current board of directors were unable to settle their differences with Wilson, and the proxy fight continues as the founder seeks three board seats.
Meanwhile, Lululemon announced last month that it had hired a new CEO, Heidi O'Neill. However, she won't start until September.
That's a long time to wait to find out about her plans to reignite sales and earnings growth.
Investment decision
Lululemon's shares have lost over 59% in the past year. During this time, you could've invested in an S&P 500 index fund, with the underlying index returning 30.4%.
NASDAQ: LULU
Key Data Points
It's very challenging for companies to turn around operations. It's particularly true for companies that try to stay ahead of the curve on fashion and trends. Once consumers perceive the brand as stale, it's an uphill battle to change that perception.
But with tepid revenue growth, faltering profitability, and an uncertain path forward for at least several months, I don't believe the shares represent a value opportunity.
I'd pass on the shares right now.
