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Key Points
Lululemon (NASDAQ: LULU) used to be a strong asset for investors, with shares increasing 321% over five years until December 2023. Recently, however, slower sales growth has shaken investors' confidence, causing a significant drop of 68% from the peak (as of Nov. 18).
This consumer discretionary stock could be a good candidate for those looking to buy the dip. Investors should consider several factors before purchasing Lululemon.
Lululemon's strategy focuses on the premium end of the market
The apparel industry is highly competitive, with numerous companies vying for consumer attention. Lululemon has carved out a niche by targeting the premium market segment with its high-quality technical fabrics. The brand appeals to both women and men, with the male segment experiencing faster growth. In 2022, Lululemon expanded into footwear.
The company benefits from significant pricing power, as consumers associate its brand with quality and are willing to pay more. Over the past five years, Lululemon's gross margin has averaged an impressive 57.6%, surpassing industry giant Nike.
Sales growth has slowed, especially in the U.S.
Lululemon was previously known for posting revenue gains exceeding 20% year-over-year, attractive to growth-focused investors. However, recent data suggests a slowdown. In fiscal 2024 (ended Feb. 2), revenue grew by 10%, and through the first two quarters of fiscal 2025, sales increased by only 7%, indicating a significant deceleration.
In the U.S., sales were flat compared to Q2 2024, while China emerged as a key growth market, with a 25% increase in revenue. Lululemon continues to expand aggressively in Asia.
This consumer discretionary stock trades at a bargain valuation
While the S&P 500 has seen substantial gains, Lululemon's shares have declined by 51% over the past five years. The market outlook on Lululemon has worsened, but the company is still profitable and maintains brand strength.
Contrarian investors might find Lululemon attractive due to its current low valuation, with a price-to-earnings ratio of just 11.2. If the company improves its financial performance, there could be upside potential as the market adjusts its valuation of the stock.
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This article has been published on fool.com via Yahoo News.
Read This Before Buying Lululemon Athletica Stock
The once high-flying stock trades nearly 70% off its record high.
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