Lululemon (NASDAQ: LULU) has faced significant challenges in 2023, with shares down over 40% year-to-date due to factors such as changes in consumer spending, competition, and a shift in fashion trends. Despite these issues, Lululemon remains profitable, showing an 11% revenue increase and exceeding earnings expectations. Currently trading at 25 times earnings, cheaper than Nike (NYSE: NKE), Lululemon’s future growth potential lies in expanding menswear and international markets. Successful execution in these areas could make it an attractive investment at current prices.

Transcript:

Austin, Lululemon, it’s been an investment darling.

It’s up over 2000% since going public, and it’s not even an AI stock.

It’s just dominating the athleisure trend.

They create a really profitable niche and then dominate it, especially during the pandemic.

But as we’ve seen with a lot of pandemic winners on the other side, they’ve been struggling, and year to date, its shares have been utterly destroyed.

So I’m just curious, what’s going on with Lululemon?

Yeah, you know, shares are down over 40% year-to-date.

And Eric, it’s worth noting, we’re only halfway through the year.

So that’s a horrible performance to start the year.

And there’s a long list of issues that have been plaguing this company.

It’s been a very volatile stock, although net net, it has returned a lot of money to investors since IPO.

But as for what’s happening this year, we’ve seen the recent departure of the company’s chief product officer.

We’ve seen changes in consumer spending patterns and a lot of old trends.

Researchers are sort of a 90s fashion trend that’s coming back now, which is taking a little bit of the wind out of the yoga pants sales.

And look, competition.

Let’s just be clear.

Yoga pants are not revolutionary or difficult to design.

And although Lululemon does have a wonderful brand, it is a premium product, and consumers are feeling the pinch from inflation.

And when you can buy, you know, somewhat comparable yoga pants from Gap and other providers for half the price or less, a lot of consumers are shifting their spending there.

And like we talked about, just rebounding 90s fashion with other brands gaining a little bit more attractions here like Birkenstocks, Abercrombie, and the Gap.

So it’s a tough time to be Lululemon.

But on the other side of the coin, yeah, the company did earn a profit of $2.50 per share in Q1, up from $2.28 in the same quarter last year.

They exceeded expectations by 12 cents here.

So they’re still growing, certainly, and they are profitable.

And the increased profit came on an 11% gain in revenue.

That’s pretty impressive.

Any double-digit gains in revenue in retail is quite a milestone, especially as we’ve seen shares like Nike struggle, and I believe they’re down 10% today.

So while there have been weaknesses, when we look at what’s happening here, it’s really been a multiple compression story.

Today, shares trade around 25 times earnings, which is a lower earnings multiple and more affordable than Nike, despite the company growing faster.

So really, the question becomes, how do investors profit here from Lululemon at this price?

And it all comes down to their future growth.

Lululemon has talked a lot about their future potential in menswear or internationally.

So with this multiple compression down to around 25 times earnings, still growing a top line in double digits, cheaper than Nike, but growing faster, if you believe that Lululemon will see growth in menswear and men’s fashion, or they see growth internationally or both, then shares could be worth picking up today.

But it really does depend on the execution of those two growth drivers continuing to drive that double-digit growth.

This company can’t continue to put up 11 to 12% top line on yoga pants alone.

Yeah, I mean, that figure you mentioned, cheaper than Nike, that is pretty astounding for longtime followers of Lululemon.

But as you noted, there are some growth drivers that if they execute on them, investors could see good returns from these prices today.

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