Down 68%, This Growth Stock Looks Oversold. Is It a Buy?
Uncategorized
Down 68%, This Growth Stock Looks Oversold. Is It a Buy?
09 mins
In the span of two years, Lululemon Athletica (NASDAQ: LULU) has gone from being a top performer in the apparel sector to one of the worst.
The stock is now down 68% from its peak at the end of 2023 as its growth has slowed dramatically. There’s no single factor that is responsible for that pullback, but rather, there have been a number of causes. The company is facing increasing competition as the athleisure market appears to be getting commoditized. By its own admission, it hasn’t done enough to keep its styles fresh. Discretionary spending has been weak in the U.S. due to a slugglish labor market and stubborn inflation, and Lululemon has been hammered by tariffs, especially the removal of the de minimis exemption, which forced it to rearrange its distribution network to fulfill e-commerce orders in the U.S. Those issues led to the departure of former CEO Calvin McDonald, and the company is still in the process of finding a permanent CEO. Founder Chip Wilson is also waging a proxy battle, signaling his frustration with management, and, to his delight, Lululemon named former Levi’s CEO Chip Bergh to its board yesterday as well.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
Despite those challenges, the stock looks like it may have just bottomed out.
On Tuesday night, Lululemon reported fourth-quarter earnings that edged past analyst expectations, but its 2026 guidance was disappointing. The stock was actually down after hours on the report, but then jumped during the regular trading session, and closed up 3.8% on Wednesday, a sign that investors may believe that the stock is too cheap to ignore.
Image source: Lululemon.
The fourth-quarter report showed that Lululemon’s problems remain. Revenue rose just 1%, or 6% excluding the extra week in 2024, to $3.64 billion, beating estimates of $3.58 billion.
Comparable sales rose 3%, but declined again in the key Americas segment, falling 3%. International sales remained robust with comps up 20%, driven by a strong performance in China.
Profit margins shrank primarily due to tariffs, which had a 520-basis-point impact on gross margin. Overall gross margin fell from 60.4% to 54.9%, and as a result, operating profit dropped 22% to $812.3 million. Earnings per share declined from $6.14 to $5.01, which topped the consensus at $4.77.
Guidance for 2026 shows that the retailer expects its challenges to continue, as it called for revenue of $11.35 billion-$11.5 billion, up from $11.1 billion in 2025 but below estimates of $11.52 billion.
Its bottom-line forecast wasn’t very encouraging either as the company sees earnings per share of $12.10-$12.30, which is down from the $13.26 it made in 2025 and worse than the consensus at $12.56. Its forecast for the first quarter was also below estimates.
The guidance implies that Luluemon’s guidance will continue to compress in 2026, and, indeed, the company forecasts a 120 basis point decline in gross margin due to deleverage on fixed costs, and investment in new store openings and its distribution center. Management also said tariffs would have a headwind of 90 basis points, but it expected to offset nearly all of it.
Despite the disappointing guidance, there is potential here for a turnaround. Management said that in North America, it has seen a good response to new product launches and a higher percentage of full-price sales, which is key to the company restoring its strong margins.
Additionally, international growth remains strong and shows that the brand still has cachet. The company expects revenue in China to increase 25%-30%, and for rest-of-world revenue to be up in the mid-teens. There are also other potential tailwinds in the company’s favor, like the naming of a new CEO, and the easing of tariffs or the reinstatement of the de minimis exemption, though that may not happen until President Trump is out of office.
Based on its forward guidance, Lululemon trades at a price-to-earnings ratio of less than 14. While the company is certainly challenged, there’s enough positives here for it to put together a turnaround, including its strength outside of North America and better performance of new styles, and makes the risk/reward favorable here. Opening a small position in the stock seems reasonable right now.
Before you buy stock in Lululemon Athletica Inc., consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Lululemon Athletica Inc. wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $510,710!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,105,949!*
Now, it’s worth noting Stock Advisor’s total average return is 929% — a market-crushing outperformance compared to 186% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Jeremy Bowman has positions in Lululemon Athletica Inc. The Motley Fool has positions in and recommends Lululemon Athletica Inc. The Motley Fool has a disclosure policy.
