Lululemon Stock Hasn't Been This Cheap Since 2020. Is It a Bargain Buy, or Is It Heading Lower?

Key Points

• Lululemon's growth rate has been slowing drastically in recent years.

• Tariffs will drive down Lululemon's earnings by approximately $240 million for the current fiscal year.

• The stock has been in a free fall as bad news continues to pile on.

• 10 stocks we like better than Lululemon Athletica Inc. ›

It's been a tough year for Lululemon Athletica (NASDAQ: LULU) stock. It has been in a free fall as tariff-related headwinds and other economic challenges have been weighing on its business. Not only has the company been experiencing a slowdown, but investors have also been worried upcoming quarters could be even worse.

As a result of the bearishness and all the adversity it has been facing, Lululemon's stock has not only fallen to a new 52-week low but also to multiyear lows. You can now buy the stock around where it was trading five years ago, when it dropped due to concerns related to the pandemic. But the big question is whether you'd want to buy it today and if it really is a cheap buy, or if the sell-off could get even worse in the weeks and months ahead.

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Image source: Getty Images.

Lululemon's sales have been taking a hit

In the past, Lululemon has been a captivating apparel stock to own because of its strong growth prospects. But in recent years, the company's sales growth rate has been slowing down significantly. And that can be a huge problem, particularly when investors are paying a premium for the stock.

LULU Revenue (Quarterly YoY Growth) data by YCharts

For the company's second quarter, which ended Aug. 3, Lululemon's sales rose by just 6.5% year over year to $2.5 billion. The company's top line came in just below analyst expectations. And comparable store sales in North America declined by 4%.

It wasn't a bad performance on the bottom line as Lululemon reported earnings per share of $3.10, which was soundly better than Wall Street's estimates of $2.88. But the problem is that earnings will be worse in upcoming periods, with the company projecting a $240 million hit to its bottom line for the current fiscal year due to tariffs. CEO Calvin McDonald said that, "the increased rates and removal of the de minimis provisions have played a large part in our guidance reduction for the year."

Lululemon's valuation looks tempting

As of the end of last week, Lululemon's stock has crashed 58% since the start of the year. It's been a disastrous performance that has easily resulted in the stock hitting a new 52-week low. And the last time it was at these levels (around $160) was in 2020, and that was briefly when the stock market as a whole crashed due to concerns related to the pandemic.

Based on earnings, Lululemon looks like it may be a steal of a deal. Currently, the stock trades at a forward price-to-earnings (P/E) multiple of 12, which is based on how analysts expect the company to perform in the year ahead. That's an incredibly cheap valuation given that the average stock on the S&P 500 trades at a forward P/E of over 21.

Is Lululemon stock worth taking a chance on today?

Lululemon stock is at multiyear lows right now, but for justifiable reasons. Investors are worried that in light of challenging economic conditions and consumers scaling back on discretionary spending that Lululemon's business may face challenges in future quarters. Tariffs exacerbate those worries.

Given the uncertainty around the business, I'd hold off on investing in Lululemon stock today. It certainly does look cheap but its premium-priced apparel may simply not be in high demand. And whether the company can win customers over in the future is also debatable, given the rising trend of fast fashion and consumers opting to buy cheap products from online retailers, which can explain Lululemon's slowing growth in recent years. The company has been facing adversity for multiple years now and while things have gotten significantly worse this year, the business has already been slowing down.

It's possible the sell-off in Lululemon stock isn't over just yet. And with plenty of uncertainty still around the business, the best option for investors may be to take a wait-and-see approach.

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