Lululemon Stock Down 22% This Year, What’s Next?

Lululemon (NASDAQ: LULU) stock surged 16% on Friday, December 9, after the company posted better-than-expected results for its fiscal third quarter, and raised its outlook for the year. Despite this sharp uptick, the athletic and casual apparel company’s stock is down 20% so far this year at its current level of around $400 from the $500 figure it was at the beginning of the year.In comparison, LULU’s peer Nike’s stock (NYSE: NKE) is down 26% since the beginning of this year. After a remarkable FY 2023, Lululemon’s stock faced significant headwinds in 2024, driven by the departure of its Chief Product Officer and changes in consumer behavior. Lululemon’s growth was hindered by its mistakes, including a high-profile product launch misfire earlier in 2024 and failure to meet customer demand for certain colors and sizes. While Lululemon continues to grow, its pace has slowed from last year, and the brand faces heightened competition in the market. The company faces increasing competition from established brands like Nike and Athleta, and newer entrants Vuori and Alo Yoga.

Despite recent challenges, Lululemon delivered a strong Q3 performance, surpassing top-line and bottom-line estimates. Lululemon earned a profit of $2.87 per share in Q3, up from $1.96 in the same quarter last year and 18 cents above expectations. The increased profit came on a 9% gain in revenue to $2.4 billion, slightly above estimates. During the third quarter, gross margin grew more than expected, increasing by 150 basis points to 58.5%, also ahead of the 57.5% that analysts had expected. Its company-wide comparable sales rose 4% during the quarter, beating market estimates of 3.2% growth.

We forecast Lululemon’s Revenues to be $10.4 billion for the fiscal year 2024, up 9% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $14.12. Given the changes to our revenues and EPS forecast, we have revised our Lululemon Valuation to $321 per share, based on a $14.12 expected EPS and a 22.7x P/E multiple for the fiscal year 2024 – almost 20% lower than the current market price.

The increase in LULU stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 12% in 2021, -18% in 2022, and 60% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period.

Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could LULU face a similar situation as it did in 2021 and underperform the S&P over the next 12 months – or will it see a strong jump?

In Q3, Lululemon’s sales grew 2% y-o-y in the Americas and international sales shot up by 33% y-o-y on strength in China. The company’s comp sales were driven by 25% growth in International comp sales partially offset by a decline of 2% in Americas comp sales. Still, the Americas remain Lululemon’s largest market, and international is still a fraction of its overall revenue. LULU’s operating margin grew 520 basis points to 20.5%.

For the all-important holiday shopping quarter, Lululemon is expecting revenue to be between $3.48 billion and $3.51 billion, representing growth of 8% to 10% from the prior year. It also expects earnings per share to be between $5.56 and $5.64 in Q4. For the full year 2024, Lululemon expects fiscal 2024 revenue to come in between $10.45 billion and $10.49 billion, compared to previous guidance of between $10.38 billion and $10.48 billion. It anticipates earnings per share to be between $14.08 and $14.16 for the full year.

Lululemon’s P/E ratio grew from about 42x at the end of FY 2021 to 47x at the end of FY 2022. While the ratio declined to around 40x at the end of FY 2023, the company’s current 29x levels, remain 28% lower than the levels of FY 2023. That said, LULU stock is trading at a discount – compared to historical averages.  LULU’s operating margins of ~20% are unmatched by its competitors, including Nike and On Holding. Lululemon has barely even scratched the surface of its men’s category, which has been a major boost for sales. The international business (which accounts for only 21% of its business) is also under-penetrated and has a particularly long runway for growth.

It is helpful to see how its peers stack up. Check out how Lululemon’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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