If a stock is down 50%, it would need to double to just get back to where it was before its decline. It's a tall task, but it also demonstrates just what kind of upside a beaten-down stock could have if it's able to get back to where it was after a sell-off.
The big question, of course, is whether it can recover, because declines like that don't just happen for no reason. Lululemon Athletica (LULU 2.37%) has lost almost that much during just the first six months of the year. At the mid-way point, it was down an incredible 45%.
With the company in the midst of a CEO transition, could it be worth taking a chance on this struggling apparel stock?
Image source: Getty Images.
The business faces a tough road ahead
The problem with Lululemon's business is simple to explain, but hard to fix. The growth has virtually evaporated for this once-top growth stock. When it reported earnings last month, the company's comparable growth rate on a constant-dollar basis was just 2%. That's a far cry from what it used to generate in the past, when double-digit growth was not a problem at all.
The fix, however, is by no means easy. New CEO Heidi O'Neill is taking over in September and has decades of experience at another apparel company that's recently been struggling, Nike. Lululemon's trendy products are not as trendy anymore. Part of it may be due to consumers pushing back on high-priced items, a rise in competition (particularly from online retailers), or both. That's why fixing the issue isn't going to be easy, regardless of who's in charge.
NASDAQ: LULU
Key Data Points
The stock is cheap, but it comes with plenty of uncertainty
Lululemon's stock is at multi-year lows. It's around the levels it was at in 2018. And it's trading at just nine times its trailing earnings. However, even that's not enough to convince investors that it's worth buying, because there are serious concerns about how competitive it may be in the long run, and whether what's worked for it in the past will be able to work in the future.
There's virtually no reason to expect a turnaround for the stock in the second half, as it can take years for a new CEO to fix a struggling business, and even then, it's not a guarantee. Nike's new CEO has been trying to turn the business around for almost two years, and it's hard to make the case that it's in much better shape today. The problems go much deeper than what management may be able to control, and that's why I wouldn't expect Lululemon's stock to turn around anytime soon, and things could still get worse before they get better.
