Sinking 48%, Is Lululemon a Buying Opportunity?

Lululemon (NASDAQ: LULU) is in an odd state of change. The athletic apparel company has been slowing down for a few years now. From fiscal 2022 onward, annual revenue growth has been declining, leading the stock to be rather volatile, with shares ultimately falling 48% year to date. Lululemon makes a good product, but this might not be so much about Lululemon being a good company as much as it is about market competition, and ultimately pricing, which might be making it harder for Lululemon to grow.

Most recently, the company relied on a declining share count to make earnings per share better than they would have been, as net income declined through the first six months of fiscal 2025. Through the first two quarters of the year, net income was down 4% year over year to $685.47 million. In all, dliluted earnings per share were basically flat for the first six months of the fiscal year and declined by 1.5% to $3.10 through the fiscal second quarter. Earnings in the second quarter would have been worse were it not for the 4% decline in diluted outstanding shares.

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Overall, Lululemon doesn't seem to have momentum right now. Comparable sales, a key measure of same-store performance, were up just 1% in the fiscal second quarter. Weak results in the Americas, a region that represents the majority of the company's revenue, dragged down overall performance.

There really is a stark contrast between the company's results in domestic markets versus global. In all, total comp sales in the Americas fell 4% in the second quarter. In comparison, total international sales increased 15%, which brought total comp sales to a 1% gain.

Guidance is calling for full-year earnings per diluted share in the range of $12.77 to $12.97. Conservatively, that would mark an 11.4% decline from fiscal 2024's earnings of $14.64 per diluted share. It would also give Lululemon a forward P/E ratio of 13.18 times earnings. By comparison, the average P/E ratio for Lululemon over the last 10 years has been 42.31. So shares are trading much lower than their traditional valuations.

It's hard to figure out how to gauge Lululemon. On the one hand, shares are trading at a decent discount relative to the longer-term trends. The problem is that there's a good reason for the dip in valuation. Revenue growth is still slowing down, and comp sales imply that Lululemon might become more reliant on driving higher prices per transaction in order to keep things going. In all, I think Lululemon is in a tough spot right now. Competitors like Nike, Adidas, or even Athleta, a part of Gap, are all vying for a piece of the pie. And in some cases, they offer better pricing compared to Lululemon.

The multitude of competitors in the athletic/athleisure space make it hard for Lululemon to be the clear predominant player. That doesn't necessarily mean that it can't do well, but right now it's looking weaker than in the past. There's also the simple matter of higher prices currently placed on consumers right now in the Americas. Lululemon's clothes aren't exactly cheap. That could be a problem in an environment where the consumer is having to be a little bit more frugal thanks to inflation and tariffs.

Looking ahead, we're facing a situation with a company that has a very good product, is facing tough competition, and is in a tough place in terms of what tariffs could do to the apparel business, with an overall lower valuation for investors. In all, I think this might be a wait-and-see stock. Lululemon itself isn't in trouble, but its stock very well could be a drag for the foreseeable future. It seems wise to stay away from this one right now. Shares are getting cheaper for a reason, and currently there are better investment options.

David Butler 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.