Market Sell Off: Is It Time to Buy a Discount on Lululemon Shares?

Lululemon (LULU 0.60%) the stock is down more than 50% this year. After huge growth during the pandemic, as the brand transitioned to sports around the world, sales slowed sharply in its key markets and with its key demographic: women. It is being attacked by other clothing brands that now sell premium products for yoga and sports.

The market selloff only exacerbated that pain for Lululemon shareholders. With the stock falling and now at its cheapest earnings ratio in 10 years, is now the time to buy a discount on Lululemon? Let’s keep digging and find out.

Women’s sales stagnate in North America

The biggest problem for Lululemon is sales in its home market of North America. Specifically, sales to female customers. Last quarter, Lululemon’s consolidated revenue rose 10% year over year to $2.2 billion. However, almost all of that growth came internationally, with sales outside North America up 35% year over year, while North America grew 3%. Men’s sales are growing faster than women’s, indicating that women’s sales in North America were flat or even declining last quarter.

Female shoppers in North America were Lululemon’s first customers and are arguably the largest demographic by far. Seeing the decline in sales, Wall Street is worried as upstarts like Alo or Vuori gain share and try to steal sports shopping dollars. To make matters worse, Lululemon just pulled their new product called Breezethrough after customer complaints, which should hurt sales even more.

That’s not bad at all, with international revenue now accounting for a bigger slice of the sales pie. There is huge runway for Lululemon to expand outside of North America. Even if sales continue to stagnate in its home market, overall revenue should continue to grow due to increasing momentum in international markets.

The rating is at its lowest level in the last 10 years

A falling stock has Lululemon trading at its cheapest price-to-earnings (P/E) ratio in 10 years. It currently trades at a P/E below 20, indicating that investors’ growth expectations have fallen. Expectations are low due to concerns about competition in North America and that the business may re-accelerate revenue growth.

There are no other reasons I can find for this sale. Profit margins look strong, over 20% over the last 12 months and have been rising for many years running. Shares outstanding begin to decline as management takes excess cash flow to buy back shares, helping increase shareholder returns. As discussed above, the male and international segments are doing well.

Can Lululemon fix its problems with North American female shoppers? I don’t know. But I would lean towards them understanding these issues and getting back to growth. The company has a long history of gaining market share in North America, and it seems more likely that this slowdown in 2024 will be a problem when looking back 10 years from now.

LULU PE report data by YCharts

Is the stock a buy?

At its cheapest P/E in 10 years, I think Lululemon stock is an excellent buy candidate at current prices. AP/E of 19.5 is well below S&P 500 market average and significantly reduces Lululemon’s future growth potential. Over the past 10 years, Lululemon’s revenue has grown nearly 500%, while operating margins have continued to grow. Investors seem to be betting that this rally is over.

I don’t think the business will grow 500% in the next 10 years, given that it generates almost $10 billion in sales, but I think revenues can still be much higher 10 years from now due to international growth and in the men’s segment. Add in some margin expansion and share buybacks, and earnings per share (EPS) should grow at a double-digit rate for the foreseeable future. At its lowest P/E in 10 years, this makes Lululemon stock a great buy at current prices.