Is this market-smashing growth stock now buying, down 48% from the peak?
Lululemon Athletica (Nasdaq: Lulu) You may not have a traditional market-scratching stock profile, but it has been one of the most performant consumer stocks of the past 20 years.
Lululemon is responsible for making athletes a larger apparel category than any other company, making it one of the most valuable apparel companies in the world.
Returning to the 2006 IPO, inventory has grown by around 1,800%, and even over the past decade, the stock has been growing strong, earning over 300%.
However, stocks have been struggling these days. After peaking in late 2023, the stock has fallen into concerns about its valuation, slowing growth and now its trade war and wider threat to the global economy. The stock price is currently down 48% from its peak.
Lululemon fell over in its first quarter revenue report Same sales Growth slowed to just 1%, while Comps fell 2% in the US. Quarterly revenue rose 7% to $2.37 billion as the company continues to open new stores.
Further down the income statement, the total margin improved from 57.7% to 58.3%, but operating profit rose just 1% to $438.6 million as operating profit margin fell by 110 basis points to 18.5% due to increased sales, general and administrative expenses.
On the bottom row, earnings per share increased from $2.54 to $2.60, offering a consensus of $2.59.
Image source: Getty Images.
It was the company’s guidance that really put pressure on the stock, partly due to the impact of the tariffs, as management said price hikes would be limited to targeting and limiting tariffs.
For a year, Lululemon maintained revenue guidance of $111.5 billion to $11.3 billion, or 6% revenue growth at the mid-point. However, we reduced our full-year revenue guidance per year from $14.95 to $15.15 to $14.58 to $14.78.
The second quarter guidance also missed the mark.
Lululemon’s decision to maintain revenue guidance with stable growth from the first quarter indicates that it does not expect to have a significant impact on demand. Rather, the challenges facing companies are primarily on the costs of customs.
The company currently expects its operating profit margin to fall to 160 basis points, and is weighing its earnings per share.
Lululemon’s growth is slowing in North American core markets, but the company continues to see a long runway in China, which holds the largest market for new store growth.
In the first quarter, China’s revenues rose 21% with a comparable sales growth of 7%, accounting for 13% of its total revenue last year.
Like other American consumer brands that did well in China apple, Starbucksand NikeLululemon appears to benefit from the same luxury brand reputation that those companies have, and the prominent culture of consumption. Furthermore, Lululemon was able to bring solid growth in China despite the weaker consumer economy.
The retailer currently has 154 stores in China, 20% of the total, with an initial goal of opening 200 stores, but now expects it to surpass that. CFO Meghan Frank said, “We still feel we are early in our journey.”
Lululemon’s challenges regarding tariffs should not be a source of vigilance from investors as they appear to be similar to what we’ve heard from other retailers in the apparel and related sectors. On the other hand, the tariff situation is sufficiently fluid so charges can change easily, and it is unclear whether tariffs are still relevant in a few years.
After cutting this year’s guidance and selling on Friday, Lululemon is currently trading at the 18-year-old forward P/E. For businesses with brand strength, historic growth rates and expanding runways in China, it looks like a good price.
Investors may need to be patient as the trade war unfolds, but at current prices, Lululemon looks like a clear shopping experience.
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Jeremy Bowman Nike and Starbucks have positions. Motley’s Fool is part of Apple, Lululemon Athletica Inc., Nike, and Starbucks. To Motley’s fool Disclosure Policy.
