2 Beaten-Down Retail Stocks to Buy and Hold

Lululemon and Target, both down over 40% in the past year, are showing signs of potential turnaround despite recent headwinds. Lululemon lowered its outlook due to weak U.S. demand and higher trade costs but is buoyed by strong international growth and strategic product innovation, now trading at 11x earnings. Target, facing soft discretionary spending and sales declines, demonstrated sequential improvement in traffic and sales, robust digital growth, and a 14.2% increase in high-margin non-merchandise revenue, with a 10x forward P/E and a 5% dividend yield. Both companies are actively adapting their strategies, and their reset valuations suggest they could be attractive long-term investments despite lingering market risks.

Analysis

Lululemon Athletica (LULU) reported a challenging Q2 FY25, with revenue up 7% to $2.5 billion and comparable sales up 1%, but EPS declined to $3.10 from $3.15 year-over-year. The company lowered its full-year guidance due to weak U.S. demand and elevated trade costs, despite robust international revenue growth of 22%. Management is actively addressing U.S. market issues by refreshing lifestyle categories and accelerating product innovation.

Target (TGT) also faced headwinds in fiscal Q2, with net sales falling 0.9% and comparable sales down 1.9%. However, the retailer demonstrated meaningful sequential improvement in traffic and sales trends compared to Q1 FY25. Digital comparable sales rose 4.3%, driven by over 25% growth in same-day services, and high-margin non-merchandise sales increased 14.2%.

Both companies, whose stocks are down over 40% in the past 12 months, are trading at significantly reset valuations, with LULU at 11x earnings and TGT at a forward P/E of 10x. While risks like tariffs and soft discretionary spending persist, their proactive strategic adaptations and growth in specific high-margin segments suggest potential for long-term recovery. Target also offers an attractive 5% dividend yield.

Key Decisions for Investors

• Consider initiating or increasing long-term positions in LULU and TGT given their significantly reset valuations and proactive strategic adjustments.
• Monitor Lululemon's execution on U.S. product innovation and the sustainability of its international growth trajectory, particularly in China.
• Evaluate Target's ability to expand operating margins through its high-growth digital and non-merchandise segments, alongside stabilization in core sales trends.
• Factor in Target's 5% dividend yield as a potential income component while awaiting broader market recovery.