The pullback in Lululemon (NASDAQ: LULU) has been nothing short of a rollercoaster ride for investors. From soaring to an intraday peak of $337.76 post their fiscal 2024 first-quarter report to plummeting to a four-year low below $250 by July 25, the stock now stands battered, down by over 50% year to date. This nosedive ranks it as the second-worst performing constituent of the S&P 500, trailing behind only Walgreens Boots Alliance.
Let’s delve into the factors driving this downward spiral and ponder upon whether this sell-off might present a potential buying opportunity for the savvy, long-term investors out there.
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Lululemon’s Historic Ascendancy Hits a Snag
Lululemon’s meteoric rise culminated in an all-time peak in December 2023, driven by a near-doubling of revenue over three years and soaring operating margins exceeding 20%. While the Lululemon results haven’t been floundering this year, the stock price is unmistakably marching in opposition to sales and margins.
The crux of the issue lies in the deceleration of sales growth. In the latest quarter, revenue rose by a modest 10% year over year, with comparable sales increasing by a mere 7% on a constant-currency basis. This stark decline from the robust 24% growth in Q1 2023 and 32% surge in Q1 2022 is hard to ignore.
Challenges in Lululemon’s Business Model
Lululemon shuns traditional wholesale avenues in favor of company-owned stores and direct-to-consumer sales, akin to Tesla’s direct-to-consumer model. While this approach offers greater operational control, it escalates fixed costs, leaving Lululemon more exposed to demand shocks.
Notably, the company’s substantial sales, general, and administrative expenses accentuate this vulnerability. With $0.35 spent on SG&A expenses per dollar of sales compared to $0.42 on cost of goods sold, Lululemon is treading on thin ice.
New Contenders Enter the Ring
Amid macroeconomic headwinds, Lululemon faces intensifying competition, particularly from Alo Yoga, vying for a slice of its market. While Lululemon may hold a strong position now, its relatively recent surge leaves it exposed to changing consumer dynamics and competitive invasions.
Nike (NYSE: NKE) grapples with parallel challenges but stands leagues ahead in global recognition. Despite this, Nike’s stocks have plummeted to a five-year low, underscoring the industry’s overwhelming adversities.
Lululemon’s current price-to-earnings ratio of 20.4 paints an attractive valuation compared to its historical metrics. However, if the sales slump persists, this seemingly cheap valuation could swiftly morph into a pricey proposition. The specter of earnings contraction looms if overbearing cost structures and shifting consumer tastes converge.
Assessing Lululemon’s Prospects
Once a soaring stock, Lululemon now finds itself relegated to the bargain bin for valid reasons. While acknowledging the formidable challenges ahead, investors must also commend Lululemon’s strides, especially in diversifying through international expansion and male apparel offerings.
The current undervaluation signals a potential entry point, even if short-term sales remain lackluster. However, close vigilance on brand resilience and SG&A management remains paramount.