What's Wrong With Lululemon Stock?

Lululemon's stock has experienced a significant 64% drawdown, now trading at a five-year low P/E of 12.6, largely due to a narrative of slowing North American athleisure growth. Despite this, the company maintains robust operating margins above 23% and continues to achieve 4% year-over-year constant currency growth in North America, outperforming competitors. Management is also aggressively pursuing international expansion, with China revenue up 22% year-over-year, and implementing a substantial share buyback program, repurchasing 8% of its market cap annually, which is expected to enhance EPS and makes the current valuation potentially attractive.

Analysis

Lululemon's stock has undergone a significant valuation reset, with a 64% decline from its all-time high pushing its price-to-earnings ratio to a five-year low of 12.6. This correction is primarily attributed to a narrative of slowing growth in the North American athleisure market, where Lululemon's revenue growth decelerated to 7.32% last quarter. However, a deeper look reveals considerable underlying strength. The company is outperforming competitors, posting 4% year-over-year constant currency growth in North America while peers like Nike experience declining sales. Critically, Lululemon has maintained robust profitability, with operating margins exceeding 23%, indicating sustained pricing power. Furthermore, the company is actively pursuing international growth, evidenced by 22% year-over-year revenue growth in China, and is deploying an aggressive capital return strategy. Management has repurchased $1.77 billion in stock over the last 12 months, representing 8% of its current market capitalization, which is poised to amplify earnings per share growth even with a more moderate top-line expansion.

Key Decisions for Investors

• Given the stock's valuation has compressed to a five-year low P/E of 12.6 despite resilient fundamentals and strong profitability, investors could view the current price as an attractive entry point for a long-term position.
• Monitor North American sales figures for continued outperformance relative to peers and track the execution of the international expansion strategy, as the 22% growth in China is a critical component of the future growth narrative.
• The aggressive share repurchase program, which retired 8% of the market cap in the last year, provides a significant tailwind for EPS growth and should be considered a key factor in total return potential, offering downside support for the stock at these levels.