Can Lululemon recover as Walmart surges past estimates?

As Lululemon Athletica Inc. (NASDAQ: LULU) grapples with a significant stock price decline in 2024, investors are questioning whether it can stage a comeback, especially in light of Walmart's recent earnings beat. 

Despite a sharp 50% drop in its shares this year, famed investor Jim Cramer remains skeptical about the athletic apparel retailer's prospects, expressing doubts about its ability to recover.

"Lulu is a company people have given up on," Cramer said on CNBC’s "Squawk on the Street," highlighting the growing concerns surrounding Lululemon. 

The company, known for its premium-priced products, faces intensifying competition in the athletic wear market, which has contributed to its declining stock price. 

Currently trading at $256, Lululemon's shares have plummeted from their high of $511 in late 2023.

The bear case for Lululemon stock

Lululemon has particularly fallen out of favor in recent weeks due to rising concerns about a potential economic slowdown in the United States, triggered by disappointing monthly jobs data. 

As consumer spending on discretionary items like premium athletic wear tends to wane during economic downturns, Lululemon could face significant challenges in maintaining its sales momentum.

If the economic slowdown persists, Lululemon may be forced to resort to discounts to drive revenue growth, a move that could compress profit margins and further erode investor confidence. 

This scenario could lead to additional downward pressure on the stock, potentially resulting in a lower stock price target.

Moreover, Lululemon does not offer a dividend, which makes it less appealing to income-focused investors who might otherwise be interested in the stock. 

Without the cushion of dividend payments, Lululemon's attractiveness diminishes further in the eyes of conservative investors.

Lululemon issued weaker-than-expected guidance

Adding to the bearish sentiment, Lululemon issued weaker-than-expected guidance in June. 

While the company managed to beat estimates in its most recent quarter, it expressed concerns about softness in the Americas market. 

This, coupled with disappointing future guidance, has raised red flags among investors.

For its second fiscal quarter, Lululemon forecasted revenue between $2.40 billion and $2.42 billion, with adjusted earnings per share (EPS) projected at $2.92 to $2.97. 

Analysts, however, had higher expectations, predicting $2.45 billion in revenue and an EPS of $3.02. Despite these challenges, Calvin McDonald, Lululemon's CEO, remains optimistic:

Analysts continue to rate Lululemon as 'overweight'

Despite the hurdles, Wall Street hasn’t completely lost faith in Lululemon. Analysts continue to rate the stock as "overweight," with an average price target of $365, which represents a potential 42% upside from its current levels. 

This optimism suggests that, while the near-term outlook for Lululemon may be clouded by economic uncertainties and competitive pressures, the long-term growth potential remains intact.

As Walmart's strong performance signals resilience in the broader retail sector, investors will be watching closely to see if Lululemon can overcome its challenges and capitalize on its growth opportunities. 

The next few quarters will be critical in determining whether Lululemon can regain its footing and restore investor confidence.