Peloton Interactive (NASDAQ: PTON) has been in flux for a while now and the situation doesn’t seem to be improving. There may be a solid business in there, but it’s struggling to scale and the new CEO is already gone.
There’s always a chance for a turnaround, but I wouldn’t invest in Peloton right now. Instead, I’d go with another fitness stock that’s also falling in value right now — Lululemon Athletics (NASDAQ: LULU). This is why.
Peloton’s problems run deep
Peloton is a leader in connected fitness, but it has struggled to grow and turn a profit. It was fortunate enough to go public almost immediately before the onset of COVID-19, which led to surging sales and excited investors. But as a young and inexperienced company, it made a number of mistakes that were too big to easily reverse.
Revenue fell 3% from a year ago in the fiscal third quarter of 2024 (ended March 31). It was the ninth consecutive annual decline, and it slowed down a while before that. The company briefly turned profitable at the height of the pandemic, but it has been reporting losses for years now. It has been in crisis mode for some time.
There were too many problems all merging into one big fiasco. There were product recalls, too much infrastructure buildout, low inventory and more. Peloton hired a seasoned CEO to take over two years ago, but he left in May.
Peloton has been widely rumored as a takeover target, but for now management is trying to revitalize the brand through cost cutting and new initiatives.
Lululemon’s problems are superficial – at least for now
Lululemon reported strong results for the first quarter of its fiscal year 2024 (ended April 28). Revenue rose 10% year-over-year and earnings per share (EPS) rose to $2.54 from $2.28. The company expects similar results for the full year. Management noted during the earnings call that it had made some product mistakes during the quarter, particularly with color. That didn’t dampen the enthusiasm for the merchandise among its loyal fans, and the company responded quickly.
However, Lululemon pulled its new “Breezethrough” collection from stores last week after customer complaints. The stock was downgraded by an analyst, and it comes on the heels of a troubling report from Nike about the state of active clothing stores, which had already sent Lululemon’s stock plummeting.
Several news outlets noted that the collection is no longer listed on the company’s website. Instead of discounting the products, they removed them entirely. This protects the branding and image from a promotional environment that could stretch the story and dilute margins.
There’s a good chance that Lululemon will take the short-term hit to its long-term bottom line. You might see the Breezethrough debacle as a loss on the P&L, but it’s out of the way, and management hopes, out of people’s minds.
When something similar happened with Lululemon’s “sheer” leggings over a decade ago, an executive left and Lululemon quickly came back. Interestingly, Sun Choe, who served as Lululemon’s chief product officer for nearly eight years, has already announced her departure. The company has not announced a replacement, but instead has a team of three people with varying responsibilities who are taking over parts of her job.
It could be worrisome that Lululemon is having multiple product failures at once. It is facing increasing competition from companies like Alo Yoga and Pending alongside regular competition from other premium brands, and in this economy, cheaper knock-offs. If it makes too many missteps, it could find itself in more serious trouble.
Lululemon continues to beat the market
Generally speaking, I would compare growth, profitability, and valuation between two stocks. But the differences here are stark and stark. Let’s say Lululemon is growing, very profitable, and cheap, while Peloton is declining, loss-making, and so cheap it’s in danger of disappearing. I would put Peloton in the value trap category and Lululemon in the bargain bin.
I can’t guarantee that Lululemon will fix its problems tomorrow and that its stock will rebound overnight, but the company is still reporting double-digit revenue growth and strong margins, and expects to continue to do so.
I also wouldn’t bet that Peloton’s business is over. It has millions of happy, loyal fans who love its products, and it has made some progress in key areas.
However, Lululemon has a long track record of being a winning company with a stock that beats the market. At its current price, it is at about a 10-year low and it seems like a good time to buy stock.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica, Nike, and Peloton Interactive. The Motley Fool recommends On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
I Wouldn’t Touch This Stock With a 10-Foot Pole — Here’s What I’d Buy Instead was originally published by The Motley Fool
