Apparel company Lululemon Athletica (LULU +0.09%) recently reported earnings, and they did little to calm investor fears about the business. Disappointing top-line numbers and a troubling forecast have resulted in the stock hitting new lows.
The company has been struggling for a while and has announced a new CEO. A turnaround won't be easy, but if it's successful, the stock could be poised to deliver some fantastic returns for investors who take a chance on the company. While there is some considerable risk with the stock, has it become so cheap that it's worth buying right now?
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Lululemon reported minimal growth last quarter
Lululemon reported its latest earnings numbers last week, and the results simply weren't good, and definitely not what you'd expect from a top growth stock, which is what Lululemon used to be.
Revenue of $2.5 billion for the period ending May 3 was up 4% year over year, but was just 2% on a constant-dollar basis. And its comparable sales were only up by 1%, which is a more useful indicator when assessing its organic growth. With such minimal growth, it's little wonder why investors have been dumping the stock this year. What was even more worrisome, however, was that its net income fell by 38% to $195 million.
In addition, the company slashed its guidance for earnings per share by over $1, now projecting a range of $10.95 to $11.15 for the full fiscal year (which ends around February).
NASDAQ: LULU
Key Data Points
The stock is cheap, but is it really just a value trap at this point?
Lululemon's value has declined by more than 60% in the past five years, with its market cap now around $14 billion. Its price-to-earnings multiple of 10 looks incredibly low given that the average stock on the S&P 500 trades at a multiple of around 26.
That's a steep discount, but it begs the question of whether it's simply a value trap. The business isn't doing well, profits are down, and its ability to return to growth is by no means a certainty, particularly at a time when there's rising competition and consumers are more sensitive to price.
New CEO Heidi O'Neill has a strong pedigree, with decades of experience at Nike, but a turnaround for Lululemon won't be easy. Unless you have a high tolerance for risk and a whole lot of patience, you may be better off avoiding Lululemon's stock because, while it may seem cheap, there's no guarantee that it can't go lower. It's still a highly risky buy at this point.
