Lululemon down 50% in 2024: Is now the right time to invest?

Lululemon Athletica (LULU) has seen its stock plunge by 54% this year, including a 5.5% drop on Friday. This downward trend has been compounded by recent downgrades from several analysts, most notably from Goldman Sachs. 

Despite these challenges, some investors see potential in the company’s strong market position and historical performance. 

The question remains: is now the time to buy, or should you wait for the stock to bottom out?

Goldman Sachs downgrades Lululemon

Goldman Sachs analyst Brooke Roach recently downgraded Lululemon’s stock from a Buy to Neutral, reducing the target price to $286. 

Roach’s downgrade is based on concerns over the company’s short-term growth prospects, citing poor execution and the quick withdrawal of the new Breezethrough franchise. These issues suggest that Lululemon may not be fully in control of its operations at present.

Is Lululemon undervalued?

Despite the current downturn, some investors argue that Lululemon is historically undervalued, given its growth rates. 

However, relying on past performance may be misleading due to the current macroeconomic conditions. 

The stock’s sharp decline indicates significant business challenges, but bulls believe that Lululemon’s strong brand and high-quality products give it a solid moat in the industry.

Analysts’ perspective: Too little, too late?

Some analysts might have been late in downgrading Lululemon, as the stock had already lost half its value. 

Bulls argue that the company’s fundamentals remain strong. Over the last three years, Lululemon has repurchased $2 billion worth of shares, maintained gross margins above 50%, and consistently beaten EPS estimates for 15 consecutive quarters.

Analysts from Jeffries and Citi have pointed out a shift in consumer preferences, affecting Lululemon’s popular leggings line, which now faces competition from smaller players like Alo Yoga and Vuori. 

While current consumer sentiments favor other brands, fashion trends are cyclical, and there’s potential for Lululemon to regain popularity as trends evolve.

Impact of macroeconomic conditions

The downgrades also highlight the impact of poor economic conditions, which have led to reduced consumer spending on clothing. 

While this is true for many businesses, Lululemon’s management has admitted to execution missteps, particularly in the US women’s segment. Issues such as a limited color palette and narrow core assortment, especially in leggings, have contributed to underperformance.

On a recent earnings call, management acknowledged these issues, noting that customer responses to available colors were positive, but more variety was needed. 

Additionally, stock shortages in smaller sizes were identified as a problem. 

These factors suggest that management’s errors, rather than just changing consumer tastes, have impacted performance.

Looking ahead: Short-term pain, long-term gain?

Given the current situation, analysts might be focusing too much on the short-term picture. Lululemon has the potential to realign its strategies and recover, regardless of economic conditions. 

If the company can address management issues and adapt to market demands, it may bounce back stronger.

Lululemon’s current struggles, reflected in its stock performance and recent downgrades, highlight significant challenges. 

However, the company’s strong brand, historical performance, and potential for strategic realignment offer a silver lining. 

Investors should consider whether the current undervaluation presents a buying opportunity or if it’s wiser to wait for further stability.