Stock prices of athleisure clothing company Lululemon Athletica (NASDAQ: LULU) are down about 40% from their December 2023 peak. Given its strong performance as a company, especially since 2020, is this stock ready for the bargain bin?
When the COVID-19 pandemic hit, Lululemon benefited from increased consumer spending on a range of goods. That higher spending was due to the combination of stimulus measures and the limited options consumers otherwise had to spend on experiences. At one point, Lululemon’s quarterly revenue was growing by as much as 80% year over year.
The impact of these stimulus funds has since faded, and consumers have pulled back some of their discretionary spending over the past year to deal with some inequality in the broader economy. As a result, the company’s growth rate and stock price have faltered as it tries to overcome tough comparisons and the market responds.
What the market doesn’t seem to take into account is that Lululemon’s success wasn’t a pandemic-induced flash in the pan. It is a world-class company and consumer brand with a bright future. That’s why, instead of giving up on Lululemon, investors should consider doubling down on it.
An excellent company with an impressive track record
Lululemon operates in a brutally competitive industry. I’m talking about consumer retail. The company specializes in the athleisure category and sells leggings, yoga pants and other sportswear. It has gone against clothing enthusiasts like Nikea great company in itself.
It has captured some of the retail space by building a lifestyle brand that resonates with young, active consumers. And Lululemon has grown profitably over the past two decades.
The stock has been a huge winner, returning over 2,000% in that period. So again: Lululemon was great before the pandemic, even if conditions during the pandemic (which is still officially ongoing) gave a temporary boost to sales. But now it’s about looking to the future.
Lulemon has solid growth prospects
Why has the stock price fallen? Simply put, the growth rate has slowed over the past two years. Below you can see that Lululemon’s revenue grew an average of 25% per year over the past five years. Revenue growth spiked to more than 80% at one point, and the company posted just 10% year-over-year growth in its most recent quarter.
A few things may be true, and they don’t have to spell trouble for Lululemon. Growth slowed in the wake of the pandemic, which is understandable. Lululemon is no longer a young startup, so it seems reasonable that such a growth spurt would increase demand somewhat, and eventually a slowdown would follow.
Furthermore, while inflation is well below the 2022 peak, it is still higher than the 2% target, and consumers continue to feel some financial pressure from recent price increases. America’s personal savings rate is at a nearly decade-low, and people have fewer options to make discretionary purchases. You can love a product, and I believe people love Lululemon. But discretionary items are often the first purchases made when times get tough.
The hope is that the American consumer will recover over time. The economy is cyclical and there is a good chance that people will eventually have more money to spend on discretionary spending. It’s okay to acknowledge Lululemon’s current struggles without throwing the stock into the abyss.
Shares are too cheap considering Lululemon’s fundamentals
Understandably, the slowdown in revenue growth led analysts to lower their expectations for the company. Lululemon’s expected profit growth of 12.5% is the lowest in years by a wide margin. Hence the stock’s significant decline from its highs.
But it’s possible (and seemingly likely) that the market overreacted and drove the stock too far down. Lululemon stock is currently trading at a price-to-earnings ratio of 22. Its price-to-earnings-growth ratio is 1.7, which indicates that the stock isn’t necessarily a bargain, but it is a reasonable buy given its expected growth. However, expectations are changing, and Lululemon’s growth rates will likely change even more as we move further away from the pandemic and consumer discretionary spending eventually recovers.
Such a scenario could push estimates (and sentiment) higher again, making shares look cheaper in retrospect than they do now.
That’s a theory, of course, and there’s no guarantee it will turn out that way. But long-term investing requires you to look at a stock and the company’s circumstances, look to the future, and make educated guesses about what might happen. Lululemon is a proven superstar brand with years of strong growth behind it. Odds are reasonable that the company will eventually bounce back and the shares will rise again.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: Long calls of $47.50 in January 2025 on Nike. The Motley Fool has a disclosure policy.
1 Growth Stock Down Nearly 40% to Buy Now was originally published by The Motley Fool
