Lululemon stock price is falling apart; it could get worse

Lululemon (NASDAQ: LULU) stock price is falling apart, as a company that was once red-hot in Wall Street comes back to earth. It has tumbled to a low of $260, its lowest level since May 2022 and 50% below its highest point this year. 

No longer a growth engine

Lululemon Athletica is a leading Canadian company that has revolutionised the athleisure industry which was worth over $353 billion in 2023. It still maintains a commanding market share in the industry.

Lululemon has had a spectacular growth over the years, helped by its retail and online platforms. Its annual revenue has soared from over $3.9 billion in 2020 to over $9.6 billion in 2023.

This growth happened as the number of stores in major cities continued rising. It had just 211 stores in 2012, a number that has grown to over 710 today. It hopes to continue opening these stores, albeit at a slower pace in the next few years. 

At the same time, the company has achieved profitable growth. Its net profit rose from $645 million in 2020 to over $1.5 billion. 

Analysts are optimistic that Lululemon can continue its growth trajectory in the next few years. For the year, analysts expect that its revenue will jump by 11.2% to $10.7 billion followed by $11.65 billion in 2025.

Lululemon Athletica has a long history of beating analysts estimates, meaning that its numbers will likely be better than expected.

Recent LULU earnings

The most recent financial results revealed that Lululemon business was still growing. Total revenue rose by 10% to over $2.2 billion. Most of this revenue growth came from its international segment where revenue rose by 35%. 

Lululemon’s gross profit jumped by 11% to over $1.3 billion while the operating margin fell to 19.6%. 

A key part of Lululemon’s growth has been its Chinese business, which has been growing in the past few years. The company believes that its strong brand positioning will help it to grow its revenues in the country for a while. 

At the same time, Lululemon is working to return the number of outstanding shares. It repurchased shares worth $296 million in the last quarter and has increased its authorization by $1.6 billion. 

Risks and opportunities

Lululemon stock has numerous risks and opportunities that investors should be aware about as they consider whether to buy the dip or sell the rip. 

The biggest risk for Lululemon is that the athleisure industry is not what it used to be in the past few years. It has become more competitive with many well-known brands gaining market share. 

The most popular companies are traditional names like Nike, Adidas, and Under Armour. Other newer brands have entered the industry. Some of the newer companies that are taking market share are the likes of Fabletics, Gap’s Athleta, Alo Yoga, and Vuori. 

As with other industries, this trend means that Lululemon will need to invest in promotions and marketing to grow its market share. That’s because, to some extent, these companies sell products that are almost of the same quality. 

There is also a risk that the industry is not doing well as most stocks like ANTA Sports, Nike, and Under Armour have tanked.

On the positive side, Lululemon is benefiting from its brand recognition in the industry, as evidenced by its 10% growth rate.

The other positive is that the company has become a bargain. Its price-to-earnings ratio of 20 and a forward multiple of 17.8. In contrast, the S&P 500 index, which is growing by 9% has a multiple of 20.

Lululemon’s P/E multiples are much lower than its historical numbers. Its five-year average of P/E ratio stands at 54 while the forward number sits at 45. These numbers mean that the stock is a bargain.

However, in some cases, buying bargain companies is usually riskier than investing in companies that are overvalued. For example, people who bought the cheap AMC stock have lost a fortune compared to those who bought Nvidia.

Lululemon stock price analysis

LULU chart by TradingView

Lululemon has another technical risk that you should be aware of. On the weekly chart, we see that the stock formed a double-top pattern at $484.62. Its attempt to move above that level failed as the stock formed a false breakout pattern. 

Now, the shares have dropped to the double top’s neckline at $251.40, its lowest swing in May 2022. In most cases, a double-top chart pattern is one of the most dangerous chart patterns in the market.

At the same time, the stock is about to form a death cross as the 200-week and 50-week moving averages near their crossover levels. Therefore, the base case is where the stock continues falling ahead of its next earnings on 4th September. If this happens, it will drop to the next point at $200.

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