After a guidance cut, is the worst over for Lululemon stock?

It was a tough 2024 for investors Lululemon Athletica (LULU -0.54%) as its share price fell by almost 50%. Most of the slide began after a disappointing earnings report came out in early April. After its second-quarter report was released last week, showing so-so results and a cut in full-year guidance, investors had more reason to wonder.

The latest financial report kept investors guessing. More bad news coming? Or is the worst over now for the stock?

Let’s take a closer look at the data to see if Lululemon is ready to make a change.

Sales and margins remain strong

In the second quarter, which ended July 28, Lululemon’s revenue rose 7% year over year (8% on a constant currency basis) to $2.4 billion. Revenue for the women’s segment increased by 6%, while the men’s segment saw sales increase by 11%. Accessories sales were up 7% year over year. Breaking down the numbers by region, revenue in the Americas rose 1% year-over-year (2% on a constant currency basis), while international sales rose 29% (31% on a constant currency basis). US revenue was flat, while mainland China sales rose 34% (37% on a constant currency basis).

Same-store sales rose 2% in the quarter. International same-store sales increased 19%, while in the Americas region, same-store sales decreased 3%. In China, same-store sales rose 21%.

On the earnings call, CEO Calvin McDonald told analysts that most of what hurt Lululemon’s performance in the quarter was the lack of novelty in its offerings in terms of updated colors, prints, designs and silhouettes in its women’s lines. He said this was especially true for bottoms and noted that in areas where the company had more news, it did not have enough stock to meet demand.

Management also addressed the failed launch of its Breezethrough leggings, which were aimed at hot yoga enthusiasts. Although the fabric was good, customers did not like the fit and cut of the clothes, and management ended up pulling the products from the shelves shortly after the line was introduced. Management emphasized that the company’s overall investment in this offering was small and had no material impact on its fiscal second quarter results. Lululemon plans to take what it learned from this misstep and relaunch an updated Breezethrough line later.

Image source: Getty Images

Lululemon’s gross margin improved 80 basis points to 59.6%, while product margin increased 130 basis points. When looking at retailers and apparel companies, product margin is an important metric for investors to follow because it’s an indication of how much a company’s products are sold for at full price versus off-price. Lululemon ended the quarter with 721 stores, up from 711 at the start. It had 672 stores at the end of last year’s fiscal second quarter.

Inventory levels are another important metric to track when it comes to apparel companies. If inventory begins to build without a large increase in store count, it could mean that increased discounting will be required in the future to get rid of older inventory. On that front, the sportswear company’s stock fell 14% in the quarter despite an increase in store numbers, showing it’s keeping the stock lean. However, it said it expects inventories to rise by a mid-teens percentage in fiscal Q3.

Looking ahead, Lululemon’s management forecast fiscal third-quarter revenue to rise 6% to 7% year-over-year to $2.34 billion and $2.365 billion, with adjusted earnings per share between 2.68 and $2.73 dollars. Ahead of the report, analysts had forecast revenue growth of about 9% for the quarter.

For the full fiscal year, the company lowered its sales and earnings guidance:

Source: Lululemon.

Time to buy dip?

The fear for investors looking at Lululemon is that the company is losing some of its brand power, affected by both competitors and changing trends. His recent weak US same-store sales and guidance, as well as problems with his business dealings with women, certainly feed into that narrative.

That said, I don’t think there is enough evidence to support the claim that Lululemon is experiencing brand issues. Its gross margin and stock are both in solid shape, indicating that the company hasn’t needed to cut more than usual.

To me, it looks like the clothing brand made some fashion missteps in terms of colors and styles, which is something that is pretty easy to fix. Anecdotally, I know my daughter recently searched for a Lululemon item in a certain color that sold out quickly — her experience corroborates the company’s comment from last week.

With its stock price halved this year, Lululemon now trades at a forward price-to-earnings (P/E) ratio of 17, based on analysts’ consensus estimates for next year. It is cheap from a historical perspective and also much less than the ratio of NIKEwho is also fighting.

LULU PE Ratio data (1 year ago) by YCharts.

Given its recent strong international growth and the potential for expansion in its overseas markets, I think Lululemon stock looks attractively valued at current prices. I also expect that he will be able to straighten out his business with US women. The company has faced problems in the past (remember the see-through leggings issue in 2013?) and managed to bounce back.

Popular brands tend to have lasting power. As such, I think the worst is now over for this stock. With the bar reset below, I would be a buyer at current levels.