Can Lululemon Stock Recover?

Once one of the hottest stocks around, Lululemon Athletica (NASDAQ: LULU) has largely been a lemon since peaking at more than $500 in December 2023. The company is still growing revenue, albeit at a modest pace, mostly driven by international expansion, while its gross margins have come under pressure from tariffs.

Let's take a closer look at the company's most recent results to see whether a turnaround could be in the cards.

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A rudderless ship

One of the biggest problems with the Lululemon turnaround at this point is that it is a rudderless ship. The company announced in early December that its CEO was stepping down at the end of January, and it has yet to find a permanent replacement.

It looks like the executives in place are doing the right thing, trying to lead innovation with new products like ShowZero, Unrestricted Power, and ThermoZen, while expanding in the international markets where it is seeing strength, particularly in China. Meanwhile, the company plans to lean into more influencer and brand ambassador marketing to try to grow sales. However, without someone at the helm to provide a long-term vision, investors can't be certain the new CEO will follow the same path.

As for the fourth quarter, Lululemon's overall revenue edged up 1% year over year to $3.64 billion, coming in ahead of the $3.58 billion consensus, as compiled by LSEG. Adjusted earnings per share (EPS) sank 18% to $5.01 but easily surpassed the $4.78 consensus.

Once again, there was a striking convergence between Lululemon's North American and international results. Americas revenue fell by 4%, while comparable-store sales declined by 1%. International revenue, meanwhile, soared 17%, with same-store sales climbing 20%. China revenue surged 28%, while same-store sales jumped 26%.

Gross margin decreased by 550 basis points to 54.9%, hurt by tariffs and higher markdowns. The company expects gross margins to decline by 120 basis points this fiscal year.

Looking ahead, Lululemon forecasted sales in a range of $11.35 billion to $11.5 billion, representing growth of 2% to 4%, and adjusted EPS in a range of $12.10 to $12.30. For the fiscal first quarter, it projected sales of between $2.4 billion and $2.43 billion and adjusted EPS of between $1.63 and $1.68. The sales guidance equals a rise of 1% to 3%.

Is Lululemon stock a buy?

Lululemon trades at a forward price-to-earnings (P/E) ratio of about 13.5 times, based on what is likely conservative guidance. Without a CEO, it would make sense for the company to set a low bar for a new executive to come in and jump over.

I actually like the moves the company is currently making in its turnaround efforts, so I think that, against that backdrop, investors can add some shares of this beaten-down apparel stock.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. The Motley Fool recommends London Stock Exchange Group Plc. The Motley Fool has a disclosure policy.