Down 54%, Can This Growth Stock Soar Over the Next 3 Years?

Investor sentiment appears to be broadly improving since President Donald Trump dialed down some of his threatened tariffs for the time being. As a result, the market has slowly been rising back toward its record high. Not all companies are riding this positive momentum, though.

There's one business that was once a Wall Street favorite. That view has changed. As of June 24, this growth stock is trading 54% below the peak it touched in December 2023. Can it recover and soar over the next three years?

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Going from darling to dud

The stock that has taken such a beating is Lululemon (NASDAQ: LULU), the athleisure pioneer that rose to prominence because of its popular women's yoga pants. In the five years leading up to the peak, the stock gained an astonishing 319%. But concerns about its valuation and slowing growth left investors feeling jittery, and the stock price tanked.

In its fiscal 2025 first quarter, which ended May 4, Lululemon did beat Wall Street's expectations marginally. Revenue totaled $2.37 billion (compared to the $2.36 billion analyst consensus), while diluted earnings per share came in at $2.60 (ahead of the $2.58 expected). But that's where the good news ends.

As has been the case with other retailers, Lululemon is directly impacted by the tariff situation. While President Trump has implemented a 90-day pause on some of his tariffs for negotiations, it's anyone's guess what will happen when that period ends on July 8. Because most of Lululemon's products are manufactured in Asia, particularly in Vietnam, the reimposition of Trump's higher import taxes would have a negative impact on its business.

This is what Lululemon's leadership team was thinking about when it lowered its fiscal 2025 guidance. Investors certainly weren't pleased with that: The stock is down by 30% since the day of the Q1 financial update. The expectation now is for Lululemon to report fiscal 2025 EPS in the range of $14.58 to $14.78, which would translate to disappointing 0.3% year-over-year growth (at the midpoint).

Tariffs will increase costs for the business. In order to offset this, Lululemon will raise its prices on certain items. In an already tough economic environment, consumers may not appreciate that extra squeeze to their wallets.

Lululemon's growth problem

Even before the calendar turned to 2025, Lululemon's growth was slowing. In its fiscal 2021, 2022, and 2023, the company reported year-over-year revenue gains of 42.1%, 29.6%, and 18.6%, respectively. Growth dropped further to 10.1% for fiscal 2024. And it decelerated to the single-digit range in the company's latest fiscal quarter.

Even more noteworthy are the struggles occurring in the company's key Americas region, where comparable sales declined by 2% in Q1. Given the high-end prices at which its apparel sells, Lululemon might be more sensitive than some other retailers to the changing macroeconomic landscape.

"My sense is that in the U.S., consumers remain cautious right now, and they are being very intentional about their buying decisions," CEO Calvin McDonald said on the earnings call.

The bright spot was China. Lululemon's comparable sales in the world's second-biggest economy jumped 7% in its fiscal first quarter. China remains a major growth opportunity for Lululemon.

High risk, high potential reward

It's not easy operating in the retail sector, especially when it comes to apparel and footwear. The competition is incredibly fierce. Lululemon has no shortage of rivals vying for market share, from industry heavyweights like Nike and Adidas to young brands like Alo Yoga and Vuori.

Add this to constantly changing consumer preferences, and it's difficult to predict how things will look for the company three years down the road. To its credit, Lululemon has had a fantastic rise in the past decade. Its well-established brand should support its staying power.

The stock trades at an appealing price-to-earnings ratio of just 15.8 -- its cheapest valuation by that metric in the past decade. But only investors who can handle the high levels of near-term uncertainty should consider buying the stock now. Should Lululemon show fundamental improvements sooner rather than later, investors' relief could propel the stock price significantly upward by 2028. The risk is elevated, though, that it won't.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. and Nike. The Motley Fool has a disclosure policy.