Inflation remains a lingering headwind for consumer spending. The latest data shows the producer price index rising 6.5% year over year for May -- the highest increase since 2022. This isn't the news Lululemon Athletica (LULU -1.88%) wanted to hear, as higher prices for everyday essentials leave less money for discretionary items like apparel.
Lululemon's sales growth has slowed over the past two years, which coincides with the spike in inflation that began in the aftermath of the pandemic. The question is whether persistent inflation will continue to pressure its sales and margins, potentially sending the stock to fresh lows in the near term.
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Weak demand continues to plague Lululemon
Lululemon's revenue rose just 2% year over year on a constant-currency basis last quarter. This is well off the pace in mid-2023, when it reported an 18% increase in revenue. Comparable sales from existing stores fell 2% year over year on a currency-adjusted basis.
Weak demand is hurting profitability. Gross margin dropped over four percentage points to 54.2%. Management doesn't see relief in the near term. The company lowered full-year guidance, and is now expecting revenue to be down slightly.
Inflation is a real challenge for the business. Higher prices don't create an environment conducive to growing apparel sales. While Lululemon does have an advantage in operating at the premium end of the apparel market, the dip in gross margin shows it is not benefiting from pricing power. This could indicate increasing competition from other brands.
Adding to the uncertainty is a recent leadership change following Calvin McDonald's January departure as CEO. This was followed by underperforming product launches last quarter and negative social media comments about the brand.
NASDAQ: LULU
Key Data Points
Is the stock a bargain or a value trap?
There is uncertainty and negative sentiment around the stock. While the stock trades at a bargain valuation of just 11 times forward earnings estimates, I would wait before buying.
The change in leadership adds to the uncertainty around Lululemon's product strategy, which has already shown mixed results. While some product updates have received positive customer response, recent releases haven't translated into sales growth in other products as management expected.
While international revenue grew 22% year over year last quarter, negative brand sentiment has hit the American segment hard, resulting in a 4% year-over-year decline.
Heidi O'Neill, who previously worked at Nike for over 25 years, will join Lululemon as the new CEO on Sept. 8, 2026. Until then, there's no catalyst for a product strategy shake-up to reignite demand.
Lululemon could turn out to be a bargain at these levels, but it could also be a value trap. Beyond the near-term inflation headwinds, the uncertainty around the company's product strategy doesn't provide a clear path for improving sales anytime soon. I would wait until the new CEO comes on board later this year before considering a position in the stock.
