lululemon Stock Drops 37% in 3 Months: A Bargain Buy or Time to Sell?

Core Viewpoint - lululemon athletica inc. (LULU) has experienced a significant decline in stock performance, dropping 37% over the past three months, which is substantially worse than the Textile - Apparel industry's decline of 15.8% and the broader market's growth of 6% and 9.6% [1][2][8] Financial Performance - The company's first-quarter fiscal 2025 results showed a revenue increase of 7%, but comparable sales only rose by 1%, indicating weak store traffic in the U.S. [16] - The Zacks Consensus Estimate for LULU's fiscal 2025 sales implies a year-over-year growth of 5.6%, while earnings per share (EPS) is expected to decline by 2% [23] Margin Outlook - Rising import tariffs, specifically 30% on goods from China and 10% from other countries, are expected to negatively impact gross margins in the second half of fiscal 2025, leading to a revised gross margin forecast [2][17] - The company anticipates a decline in gross margin by 110 basis points and operating margin by 160 basis points for fiscal 2025 due to tariffs, higher markdowns, and foreign exchange headwinds [17] Valuation Concerns - LULU's current forward 12-month price-to-earnings (P/E) ratio is 13.55X, which is higher than the industry average of 11.32X, raising concerns about whether the stock's valuation is justified [9][11] - The price-to-sales (P/S) ratio stands at 2.1X, above the industry's 1.57X, contributing to investor unease regarding its value proposition [10] Competitive Landscape - LULU's stock performance has been significantly weaker compared to peers such as Guess Inc. (GES) and Hanesbrands (HBI), which saw increases of 51% and 21.6%, respectively, over the same period [3][8] - Competitors like Guess, Hanesbrands, and G-III Apparel Group have lower forward P/E ratios of 10.41X, 9.46X, and 8.27X, respectively, indicating that LULU's valuation appears out of step with its growth trajectory [11] Inventory and Demand Challenges - Inventory levels have raised concerns, with units up 16% and dollar inventories rising 23% year over year, which may lead to heavier discounting if demand does not improve [18] - Management has indicated that American consumers remain cautious and selective, resulting in stagnant growth in the critical U.S. market [16] Future Outlook - The company is focusing on international expansion and product innovation as long-term growth drivers, but near-term profitability challenges and cautious guidance have dampened investor confidence [19][25] - Analyst estimates for LULU's earnings have shown a downtrend, reflecting skepticism about the company's near-term growth potential [20][26]