Lululemon Athletica, a leader in the athleisure market, has seen a dramatic decline in stock performance this year, down 53% year-to-date and 65% from its peak in late 2023. Despite its previous success in establishing yoga pants as a staple in consumers’ wardrobes and maintaining a strong premium brand image, the retailer is currently grappling with several challenges that have contributed to its stock woes.
The primary issue stems from declining comparable sales in the U.S., its largest market. These declines are attributed to several factors, including weakened consumer discretionary spending in apparel, a shift away from yoga pants toward more relaxed fits, as well as internal missteps. Management has acknowledged that the company did not sufficiently innovate or refresh its loungewear and social wear segments, leading to sellouts in popular styles across other categories.
Adding to these complications, Lululemon adjusted its earnings forecast downward in its recent second-quarter report, largely due to the cessation of the de minimis exemption. This previous carve-out allowed the company to import goods valued at $800 or less without incurring tariffs—a benefit it had leveraged for shipping e-commerce orders from Canada to the U.S. The end of this exemption means Lululemon will need to revamp its supply chain to mitigate the impact of increased taxes.
On the international front, while the U.S. market struggles, Lululemon has witnessed robust growth in China, its second-largest market, where comparable sales surged 17%, boosting overall revenues by 25%. The company is strategically expanding its presence in China, opening five new stores recently with plans for at least 15 more stores in the next year. This growth trajectory reflects Lululemon’s potential in markets where consumer demand for premium brands remains strong.
Despite the challenges, many analysts view Lululemon’s current stock price as an attractive buying opportunity for long-term investors. The challenges it faces appear mostly temporary, and macroeconomic factors impacting discretionary spending are likely to improve over time. Additionally, the removal of the de minimis exemption is a one-off issue that won’t recur.
To enhance its product offerings and inventory management, Lululemon has announced plans to increase the proportion of new styles from 23% to 35% by next spring. The company aims to accelerate its go-to-market process to better align its inventory with customer preferences and ensure availability of popular items.
Financially, Lululemon’s revised earnings per share (EPS) guidance suggests that the stock is currently valued at a forward price-to-earnings (P/E) ratio of 14, significantly lower than the broader S&P 500. This valuation implies an expectation of stagnation in growth; however, if the company can return to its historical performance levels, considerable upside potential may exist.
In summary, while Lululemon faces a challenging period, particularly in its domestic market, the company has strong foundations for recovery, especially internationally. Given its current valuation and ongoing strategic initiatives, many believe there is a promising outlook for the stock in the coming years.
