Lululemon stock: valuation reset done, 20% gains possible

Lululemon (LULU) stock price has crawled back in the past few weeks as some investors buy the dip. After bottoming at $225 on August 5, the stock has jumped by over 30% to $304. It remains about 40% below its highest level this year.

Lululemon is a bruised company

For a long time, Lululemon Athletica was one of the hottest companies in Wall Street, thanks to its superior growth in the US and other countries.

This growth accelerated as the company increased its store count from just 211 in 2012 to 711 in 2023. 

It gained more popularity during the COVID-19 pandemic as more people bought its products. As a result, its revenue jumped from $3.9 billion in 2019 to $4.4 billion in 2020.

Lululemon’s growth trajectory has continued, with its annual revenue soaring to $9.98 billion in the trailing twelve months. 

Recently, however, the company has struggled, which explains why its stock remains 40% below its all-time high.

There are three main reasons why Lululemon stock has crashed. First, the company’s products are easy to disrupt. As a result, popular companies like Nike, Gap – through Athleta -, Under Armour, Adidas, ON Holdings, and Fabletics have all launched similar products.

Therefore, consumers have a variety of products to choose from, and in most cases, are opting for cheaper quality ones from popular brands. This competition has led to a slower revenue growth in the past few quarters.

Second, demand for some consumer-discretionary product items has weakened in the past few months because of the elevated inflation in most countries. The most recent inflation data from the US showed that the headline CPI dropped to 2.4% from the previous 2.5%.

While the drop was notable, the reality is that inflation has jumped by over 30% in the past few years. 

Third, Lululemon Athletica has dropped because of a valuation reset since it was one of the most overvalued firms in the retail industry. As a result, its price-to-earnings ratio has dropped from 65 in 2023 to 23 today.

Read more: Can NHL deal save Lululemon’s beleaguered stock?

Lululemon growth has stalled

For a long time, Lululemon Athletica was used to deliver double-digit revenue growth, a trend that has now faded.

The most recent quarterly results showed that its revenue rose by 7% in the second quarter to $2.4 billion. Its Americas revenue rose by just 1%, while its international sales rose by 21%. Most of these sales came from China, one of its fastest-growing markets.

Lululemon’s income from operations rose by 13% to $540 million as it implemented some cost cut measures. 

Analysts expect that its business slowdown continued last quarter. The average estimate is that its revenue rose to $2.35 billion, up slightly from the $2.2 billion in the same period in 2023. Based on its historical performance, there are odds that the firm will publish stronger-than-expected results. 

For the year, Lululemon is expected to make $10.4 billion, an 8.2% increase from 2023, followed by $11.2 billion next year. 

Read more: Lululemon down 50% in 2024: Is now the right time to invest?

Is LULU a good investment?

Lululemon faces several important catalysts ahead. First, central banks have started to cut interest rates, a move that could incentivise more consumer spending in 2025. In most periods, consumer discretionary companies do well when rates are coming down.

Second, it is growing its presence in China, a country that has unveiled several stimulus measures in the past few weeks. This spending, coupled with the rebound of Chinese assets, could spark more spending in the country.

Additionally, Lulemon’s valuation reset has happened such that its forward P/E multiple has moved to the S&P 500 average levels. Also, Lululemon is still a beloved brand that could stage a recovery, helped by cost cuts and more shareholder returns. LULU’s outstanding shares have dropped from 125 million in 2020 to 118 million today. 

Lululemon stock analysis

LULU chart by TradingView

The daily chart shows that the LULU share price has bounced back after bottoming in August. It has rallied and moved above the 23.6% Fibonacci Retracement point. 

The stock has jumped above the 50-day and 100-day Exponential Moving Averages (EMA). Additionally, the MACD indicator has crossed the zero line, while the Relative Strength Index (RSI) has risen and is approaching the overbought point at 70.

Therefore, the stock will likely continue rising as investors wait for its earnings, which will come out on November 29. If this happens, the stock may rise and retest the 50% retracement level at $370, which is 22% above the current level.

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