Lululemon Athletica’s stock has seen a recent surge after a challenging year, marked by a significant decline of about 45% year-to-date. The stock’s bounce back, particularly after the announcement of a search for a new CEO and solid fiscal Q3 results, has sparked renewed interest among investors.
The past year has been tumultuous for the athleisure brand, prompting the current CEO, Calvin McDonald, to announce his departure at the end of January. This decision followed extensive criticism from founder and largest shareholder, Chip Wilson, who noted that the company had fallen behind due to stale product lines and a sluggish response to market changes. The competitive landscape has intensified, with newer entrants like Alo and Vuori gaining traction, further complicating Lululemon’s position.
In fiscal Q3, Lululemon reported revenue growth of 7% year over year, totaling $2.57 billion, surpassing analyst expectations of $2.48 billion. Despite a decline in adjusted earnings per share (EPS), which fell 11% to $2.59, it exceeded the consensus estimate of $2.25. International markets were a significant driver of growth, with international revenue surging 33% and comparable-store sales increasing by 18%. Notably, Lululemon’s performance in China, where sales skyrocketed by 47% to $465.4 million, underscores the brand’s potential in global markets.
Conversely, Lululemon’s North American operations faced headwinds. Revenue in the Americas decreased by 2%, with same-store sales dropping 5%. These struggles are compounded by rising tariff pressures, resulting in a gross margin decline of 290 basis points to 55.6%. The retailer forecasts further gross margin contraction in Q4, raising concerns about its pricing strategy moving forward.
Inventory management remains crucial for Lululemon, which saw its inventory levels increase by 11% year-over-year to $2 billion. While not considered problematic at this stage, close monitoring is essential to prevent forced markdowns that could erode profit margins.
Looking ahead, Lululemon revised its fiscal year guidance, projecting sales between $10.96 billion and $11.05 billion with adjusted EPS ranging from $12.92 to $13.02. For the upcoming fiscal Q4, the company estimates sales between $3.5 billion and $3.585 billion, reflecting a possible decline of 3% to 1% or a growth of 2% to 4%, depending on the extra week last year.
While the stock has shown positive momentum, investors remain cautiously optimistic. The upcoming leadership change is a significant factor, as the company has yet to identify a new CEO, raising questions about future strategic directions. Restoring the North American business amidst shifting fashion trends may be challenging, but a capable leader with a fashion-centric vision could guide the brand back to prominence.
Currently trading at a forward price-to-earnings (P/E) ratio of approximately 16 based on next year’s forecasts, Lululemon’s valuation appears reasonable. However, the ability of the new CEO to navigate these challenges will ultimately determine the stock’s trajectory. Investors might consider a modest, speculative position, betting on the potential for a strong leader to help the brand regain its footing in a competitive market.
