Lululemon’s Stock Remains a Lemon: Will It Rebound or Should Investors Run?

Lululemon's stock performance continues to squeeze investors harder than their high-performance leggings.

Market Reality Check

The athleisure giant's shares keep stretching downward—testing investor patience like a prolonged yoga hold. No bullish momentum in sight, just consistent downward pressure that's making shareholders sweat more than a hot yoga session.

Recovery Prospects

Can this retail favorite bounce back, or is it destined to remain portfolio deadweight? Traditional analysts point to fundamentals while crypto natives watch with amusement—another legacy asset proving why decentralized finance bypasses these traditional market dramas entirely.

Investment Verdict: Stay away unless you enjoy watching your positions get more twisted than advanced yoga poses. Sometimes the market's message is simple: when something acts like a lemon, maybe it's just a lemon.

Looking to regain momentum

While its fiscal Q2 results were largely in line with analyst expectations, Lululemon's management owned up to its mistakes. It noted that the landscape for athleisure apparel has become more competitive, and that its product lines have gotten stale.

The company said that when it's gotten its products right, they have done well. However, it needs to MOVE more quickly. On this front, the company is looking to work with vendors to fast-track certain designs and reduce lead times. It added that in areas it has innovated, like performance apparel, it has been gaining market share. However, the changes being made will likely have more of an impact next year.

The quarter itself for Lululemon wasn't terrible. Overall revenue climbed by 7% year over year to $2.53 billion, while its adjusted earnings per share (EPS) fell by less than 2% to $3.10. Analysts were looking for EPS of $2.88 on sales of $2.54 billion.

While the company is struggling with its North American operations, it's doing well internationally. Americas' revenue edged up 1% to $1.8 billion, while same-store sales fell 4%. However, international revenue climbed 22%, with comparable-store sales surging 15%.

China led the way, with revenue roaring 25% higher to $392.9 million, with same-store sales up 17%. Rest-of-world sales jumped 19% to $374.1 million, as comparable-store sales climbed 12%.

Lululemon's men's category saw revenue rise by 6%, while women's sales increased by 5%. Accessories sales were strong, climbing 15%.

Gross margin fell 110 basis points to 58.5%, while inventory levels increased 21% to $1.7 billion. These are two metrics to watch for struggling retailers and brands, as they can lead to more pain in the future.

Lululemon's gross margins are holding up pretty well, meaning it's still doing a lot of full-price selling, but the inventory is something to keep an eye on. Tariffs cloud the picture a bit, as some companies wanted to stock up ahead of increases. Tariffs will also cut into its gross margins in the future.

Looking ahead, Lululemon lowered its guidance. It now sees sales coming in $10.85 billion to $11 billion, representing growth of 2% to 4%, and adjusted EPS in a range of $12.77 to $12.87. That was a big change from its earlier guidance for EPS of $14.58 to $14.78 on revenue of $11.15 billion to $11.3 billion. Tariffs and the removal of the de minimis exemption are expected to now take a big bite out of its gross margins and thus, earnings.

For fiscal Q3, Lululemon is looking for sales of between $2.47 billion and $2.5 billion, good for growth of 3% to 4%, and adjusted EPS of between $2.18 and $2.23.

Image source: Getty Images.

Should investors buy the dip?

The first way for a company to improve is to figure out where it's making mistakes and work to fix them. Lululemon's problems have been going on for a while now, but it finally looks ready to take some real action to fix them. It's going to need to both innovate and act quicker to get trends right.

I don't think the brand is broken, as it is still getting strong margins, which is a sign it's not overly discounting. However, it can no longer just rely on its brand's reputation. On the positive side, the company is seeing strong momentum internationally. While China has been a drag on many higher-end brands, the country has actually been a big growth driver for Lululemon.

From a valuation standpoint, Lululemon now trades at a forward price-to-earnings (P/E) ratio of around 11 times next year's analyst estimates. That compares to about a 30 times forward P/E for the struggling(NKE -1.91%).

While there is a risk that things get worse, I think between the plan it has in place and the current valuation, it's worth taking a shot on the stock.