Giving credit where it's due, Citi analyst Paul Lejuez saw it coming a mile away. He downgraded Lululemon Athletica(NASDAQ: LULU) in July on concerns that "the overall product assortment lacks cohesion, is not compelling/exciting to the consumer and feels disjointed." He added that "younger brands present additional risk to [Lululemon's] sales and margin."
Just as predicted, the fitness apparel brand's second-quarter results were crimped by a "product plan that introduced less newness," leading to sales that fell short of analysts' estimates.
The company's management team is still optimistic about the future, of course, even as it lowered full-year revenue and earnings guidance. As CEO Calvin McDonald explained during the second-quarter earnings conference call: "For 2025, we are fast-tracking several new styles within performance shorts, tops, and tracksuits." He added that the company "will begin to see the benefits of these strategies over the upcoming quarters and return to our historical levels of newness no later than spring 2025."
That may well be the case.
There's an even better reason to take a swing on this ticker that's currently trading 50% below its late 2023 peak. The bigger, actual reason Lululemon shares are down so much in such a short period of time is about to evaporate. The stock could start to recover even before that process is fully complete, in fact, meaning it would be wiser to move sooner rather than later.
The struggle is real
The yoga and fitness apparel company has made a handful of unforced errors lately. Chief among last quarter's was the release of its Breezethrough leggings, which -- in a reprisal of a similar 2013 gaffe -- were pulled from shelves due to an awkward, uncomfortable fit. It's also arguable that Lululemon underestimated up-and-coming rival brands like Vuori, Alo Yoga, and others.
It would also be naïve to ignore that even the higher-income households this athleisure brand usually targets are feeling the sting of inflation. Walmart, for example, says the bulk of the market share gains it's achieved over the course of the past couple of years has been mostly driven by households earning in excess of $100,000 per year. This crowd is looking for ways to stretch their budgets, too.
Image source: Getty Images.
End result? Although Lululemon's Q2 earnings improved 17% year over year to a per-share profit of $3.15 (versus analysts' estimate of $2.93), last quarter's top line of $2.37 billion was up a modest 7%, falling short of the expected $2.4 billion. Worse, same-store sales growth of only 2% fell well short of the anticipated pace of 5.9%. Its Americas business was particularly weak.
There's no relief on the near-term horizon, either. Now Lululemon's calling for 2024 earnings of between $13.95 and $14.15 per share, down from the previous range of $14.27 and $14.47 per share. Revenue guidance was dialed back too, with the company only looking for top-line growth of 8% to 9% this year.
But despite the grim picture, now's the ideal time to jump into a long-term stake in Lululemon stock.
Rebound brewing for Lululemon
That's not exactly a comfortable idea to swallow right now. After all, Lululemon is reeling in its 2024 guidance for a reason. Management isn't even discussing the prospect of accelerating growth during the second half of this year. The current regrouping is all about what could take shape in 2025.
There's also no denying that lingering economic malaise is finally taking a toll on the middle class that makes up the majority of Lululemon's target market. In addition to Walmart's anecdotal observation, a recent survey by the National True Cost of Living Coalition indicates that 65% of Americans considered to be part of the middle class say they're struggling financially right now, with no end to the misery in sight.
That's against a backdrop of record-breaking credit card debt among U.S. consumers, with payment delinquencies on that debt recently creeping to a 13-year high. It's the sort of environment that can stymie discretionary spending on premium yoga wear, particularly when more affordable and newer alternatives are available.
There are a couple of important details about Lululemon and its stock that the market may be overlooking right now.
The first is that -- in spite of new rivals and a misfire with its Breezethrough leggings -- this is still the top name in the women's athleisure and yoga space. It's stumbled on the innovation front before, and bounced back every time to hold on to its top spot in this business. The performance shorts, tops, and tracksuits in the works for early 2025 are a credible part of the current bounceback plan.
But the challenging economy that's now taking a bite out of the middle class's budgets? That's the other important detail that interested investors must understand.
Stocks aren't priced reactively to headlines and results as they're published. They're priced predictively, reflecting that company's plausible future. One only has to look at Lululemon stock's recent history to see this. Shares peaked in late 2023, when the economic environment didn't seem so bad. Somehow the market knew what was coming this year anyway, aggressively driving shares lower even before troubling data started surfacing.
In a similar sense -- presuming economic growth will be rekindled next year by looming interest rate cuts -- Lululemon shares are likely poised to begin a recovery before that economic rebound becomes obvious.
This might help. Despite all the recent drama and volatility, the analyst community still collectively considers this ticker to be a strong buy. It's sporting a consensus target price of $325.56 per share. That's 27% above Lululemon stock's present price.
Not for everyone, but maybe for you
It's not an ideal fit for everyone. Even if it's undervalued, Lululemon stock is likely to remain volatile for the foreseeable future. It could end up moving markedly lower from its current price before all is said and done.
For bargain-minded growth investors who can stomach some volatility, though, this stock's halving since December is a prime opportunity to step into a long-term position at a dirt cheap price. The company's resilience and long-term potential has never been in question, even among its recent critics.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Walmart. The Motley Fool has a disclosure policy.
