Lululemon stock analysis: is this fallen angel a good buy?

Lululemon (NASDAQ: LULU) stock price has become a fallen angel as it became one of the worst-performing blue chip companies this year. It has tumbled by almost 42% this year while the S&P 500 and Nasdaq 100 indices have risen by double digits. Also, the stock has lagged behind the SPDR S&P Retail ETF (XRT), which has risen by 1.5% this year.

Lululemon Athletic growth concerns

Lululemon, the giant Canadian athleisure brand, flourished during the Covid-19 pandemic as demand for its products jumped. 

As a result, its annual revenue has grown from over $3.9 billion in 2019 to over $9.6 billion in 2023, making it one of the best-performing companies in the industry. Most importantly, this growth has happened organically since it has not made any major acquisitions recently. 

Lululemon’s performance happened because of its increasing locations in the US, Canada, and other markets like China. It was also helped by the strong performance of its e-commerce operations. 

Most importantly, Lululemon has achieved profitable growth as its net income has jumped from over $645 million in 2019 to over $1.5 billion in 2023 and it expects the growth to continue. 

However, the Lululemon stock price has plunged as investors remain concerned about its growth. In its recent results, Lululemon said that its revenue rose by 10% in the last quarter to $2.2 billion.

Its most established markets like the US grew by 3% while its emerging markets like China had a revenue growth of 45% during the quarter. The rest of the world segment grew by 27%. 

Therefore, the LULU stock price has dropped as investors anticipate its growth will slow. For one, the pace of store openings has lagged in the past few weeks. It opened two net company-operated stores and closed two. In the past, the company was used to opening hundreds of stores per quarter. 

Competition challenges have remained

Lululemon stock price has also dropped because of the rising competition in the industry. Indeed, just recently, Nike, which is also a major player the athleisure business reported weak financial results.

Most of this competition is coming from several well-known brands like Nike, Adidas, and ANTA Sports. It is also battling other companies like ON Holding, which is backed by Roger Federer, Athleta, which is owned by Gap, and Fabletics. This competition has made the industry highly crowded, which could affects its margins. 

Notably, this trend is happening at a time when growth in the athleisure growth is slowing in the next few years. In a recent report, Grandview Research showed that the industry will have a compounded annual growth rate (CAGR) of 9.3% between 2024 and 2030. It was estimated to be at $358 billion in 2023. At its peak, it was having double-digit growth rate.

Therefore, this trend will likely remove the premium that Lululemon Athletica has always had in the market.

Lululemon stock price forecast

LULU chart by TradingView

The daily chart shows that the LULU share price has been in a strong bearish trend after peaking at $517 earlier this year. It has dropped below the 78.6% Fibonacci Retracement point. 

Also, the stock formed a death cross as the 200-day and 50-day moving averages crossed each other's. In most cases, this is one of the most bearish signs in the market.

Most importantly, the stock is nearing the crucial support level at $292.70, its lowest point on May 29th this year. A break below the support at $292.7 will point to more downside as sellers target the crucial support level at $251, its lowest point in May 2022. This price is about 15% below the current level.