Market Sell-Off: Time to Buy the Dip on Lululemon Stock?
Lululemon (NASDAQ: LULU) stock is down over 50% this year. After huge growth during the pandemic as the brand rode the transition to athleisure around the world, sales have suddenly slowed in its key markets and with its key demographic: women. It is being attacked by other apparel brands who are now selling premium yoga and athleisure products.
The market sell-off has only exasperated this pain for Lululemon shareholders. With the stock down and now at its cheapest earnings ratio in 10 years, is now the time to buy the dip on Lululemon? Let's keep digging and find out.
Stagnating women's sales in North America
The largest problem for Lululemon are sales in its home market of North America. Specifically, sales to women customers. Last quarter, Lululemon's consolidated revenue grew 10% year over year to $2.2 billion. However, almost all of this growth came internationally, with sales outside of North America growing 35% year over year while North America grew at a measly 3%. Men's sales are growing faster than women's, indicating that women's sales in North America were flat or even down last quarter.
Women shoppers in North America were Lululemon's first customers and are likely still its largest demographic by far. Seeing sales decline has Wall Street worried as upstarts such as Alo or Vuori gain share and try to steal shopping dollars for athleisure. To make matters worse, Lululemon just pulled its new product called Breezethrough after customer complaints, which should further impact sales.
It isn't all bad, with international revenue now making up a larger portion of the sales pie. There is a huge runway for Lululemon to expand outside of North America. Even if sales keep stagnating in its home market, overall revenue should keep growing due to the growing push from international markets.
The valuation is at its lowest level in 10 years
A sinking stock has led Lululemon to trade at its cheapest price-to-earnings ratio (P/E) in 10 years. It currently trades at a P/E under 20, which indicates that growth expectations from investors have fallen. Expectations are down because of fears around competition in North America and whether the business can reaccelerate revenue growth.
There are no other reasons I can find for this sell-off. Profit margins look strong at over 20% in the last 12 months and have climbed for many years in a row. Shares outstanding are beginning to fall as management takes excess cash flow to repurchase stock, helping boost shareholder returns. As we discussed above, the men's and international segments are doing just fine.
Can Lululemon fix its issues with women shoppers in North America? I don't know. But I would lean toward them figuring out these issues and getting back to growth. The company has a long history of gaining market share in North America, and it seems more likely than not that this slowdown in 2024 will be a blip when we look back 10 years from now.
Is the stock a buy?
At its cheapest P/E in 10 years, I think Lululemon stock is a great buy-the-dip candidate at current prices. A P/E of 19.5 is well under the S&P 500 market average and heavily discounts Lululemon's future growth potential. In the last 10 years, Lululemon's revenue has grown at close to 500% while operating margins have continued to climb higher. Investors seem to be betting that this growth is over.
I don't think the business will grow by 500% in the next 10 years, given that it generates close to $10 billion in sales, but I think revenue can still be much larger in 10 years' time due to growth internationally and in the men's segment. Add on some margin expansion and share repurchases, and earnings per share (EPS) should grow at a double-digit rate in the foreseeable future. At its lowest P/E in 10 years, this makes Lululemon stock a great buy at current prices.
Should you invest $1,000 in Lululemon Athletica right now?
Before you buy stock in Lululemon Athletica, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Lululemon Athletica wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $763,374!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 12, 2024
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.
Market Sell-Off: Time to Buy the Dip on Lululemon Stock? was originally published by The Motley Fool