Is buying Lululemon (LULU) stock on the dip worth considering? Well, it’s all about how you see its valuation. For now, I am neutral on LULU stock. Shares have slumped in 2024 following concerns about the company’s sales in its largest and most important U.S. market. While the company’s earnings metrics aren’t particularly attractive, international sales growth and falling interest rates represent catalysts.
The stock also trades at a considerable discount to its average price target. I want to be bullish but am a little concerned about the valuation metrics; therefore, I’m neutral. If investors can see beyond the metrics, it’s an investment worth considering.
Lululemon’s Fall From Grace
To explain my neutral position, I will start by closely examining the declining stock price. Lululemon Athletica, a high-end yoga and athleisure clothing brand, is trading close to its post-pandemic lows. The downward trajectory started at the turn of the year when Lululemon stock was trading around $500 per share. At the time of writing, the stock is down 48% year-to-date.
The falling share price reflects a declining sentiment. Despite nine consecutive earnings and revenue beats and strong international sales growth, especially in China, investors have grown concerned by stagnating sales in the U.S. Analysts have noted plateauing growth among the American womenswear and activewear market, which are the company’s key markets.
“Shifting now to the U.S. As we mentioned on our last call, we’ve seen a slower start to the year due to several internal factors, including missed opportunity in women’s and bags, which we are actively addressing, and some ongoing choppiness in the consumer environment,” CEO Calvin McDonald said in the Q1 2024 earnings call.
The company announced sales growth of just 2% in the U.S., while the Chinese Mainland market saw sales surge by 52%. In addition to McDonald’s appraisal of a choppy consumer environment, some analysts have pointed to increasing competition from emerging brands like Alo Yoga and Vuori, strategically positioning themselves near Lululemon stores to capture market share.
Can Lululemon Turn Things Around?
However, as mentioned, there is a case for investing in LULU. The big question for opportunist investors is whether Lululemon can turn its fortunes around. International sales expansion is key to the company’s plans, with management setting the target of half of all sales outside the Americas.
The Americas accounted for over 73% of its Q1 revenue base, and in 2023, international sales accounted for just 21% of the business. This suggests that Lululemon’s international expansion strategy may still be in its infancy. “Our international business remains under-penetrated and continues to represent a significant growth opportunity,” McDonald added after Q1.
Moreover, on the U.S. front, McDonald suggested that the company had made mistakes that contributed to the recent underperformance. The CEO suggested that Lululemon had missed several opportunities, pointing to mistakes in colors and leggings. He added that consumers responded well when more colors were available.
Finally, and perhaps more generally, forecasted cuts to U.S. interest rates should positively impact consumer discretionary spending in the coming quarters. As rates fall, consumer sentiment is likely to improve.
Is Lululemon Stock Good Value?
Moving on to valuation, which is, in my opinion, the least attractive aspect of LULU stock, Lululemon currently trades at 20.3x TTM earnings and 18.8x forward earnings. On a forward basis, this puts the stock at a 20.1% premium to the consumer discretionary sector average.
Of course, growth is key to the equation. Lululemon has been growing sales and earnings faster than the sector average. However, earnings per share (EPS) are expected to grow at 10.8% annually over the next three to five years.
This pace of growth is in line with the sector average. As such, the current earnings projections give us a forward price-to-earnings-to-growth (PEG) ratio of 1.74. That’s not overly appealing for this sector.
There’s a caveat, however. Lululemon has beaten expectations for earnings and sales for each of the last nine quarters. That brilliant track record may point to further outperformance in future quarters. Lululemon is due to report on August 29.
Is Lululemon Stock A Buy According To Analysts?
On TipRanks, LULU comes in as a Moderate Buy based on 13 Buys, eight Holds, and one Sell rating assigned by analysts in the past three months. The average Lululemon Athletica stock price target is $369.09, implying a 40.1% upside potential.
The Bottom Line On Lululemon Stock
Lululemon stock trades at a considerable discount to its average share price target, which will reassure some investors. However, the current earnings forecast isn’t particularly attractive given the company’s price-to-earnings ratio, which points to overbought conditions according to the PEG ratio. Nonetheless, several catalysts could see growth pick up in the near term, including falling interest rates and international sales growth.
