Lululemon Stock Is a Buy After CEO Exit

Apparel retailer Lululemon (NASDAQ: LULU) has been struggling, and the story remained unchanged in the third quarter. While total revenue rose by 7% year-over-year and comparable sales increased by 1%, the international segment did most of the heavy lifting. In the Americas, comparable sales plunged 5%, leading to a 2% revenue decline. Earnings per share dropped by 10% as costs rose faster than revenue.

Along with the quarterly report, Lululemon announced that CEO Calvin McDonald planned to step down on Jan. 31. McDonald has been leading the company since 2018, and revenue has more than tripled during his tenure. But McDonald was slow to recognize that Lululemon's product assortment had become stale, and corrective steps announced earlier this year likely weren't aggressive enough.

A new CEO willing to really shake things up and refresh the company's product development strategy is just what Lululemon needs.

Image source: Getty Images.

The right strategy is in place, but it took too long

Lululemon has been suffering weak sales growth in the Americas since early 2024. In the first quarter of that year, comparable sales in the Americas were flat. Since then, results have been inconsistent and generally negative. For all of 2024, comparable sales dipped 1% in the Americas.

This has been a known problem for nearly two years, but it took until October of this year for McDonald to shift gears. The plan is to bring new style penetration up to 35% next spring by ramping up the introduction of new products. Lululemon is also working to reduce the time it takes to bring a new mainline product to market. Currently, it takes 18 to 24 months, an eternity in an industry where consumer preferences can shift rapidly. The company is targeting a 12- to 14-month development cycle.

These are welcome developments, but they came about a year too late. Had the company recognized the problem early, it could have potentially saved investors from an abysmal stretch. Since the beginning of 2024, Lululemon stock has shed nearly 60% of its value.

McDonald will stay on as a senior advisor through March of next year, and the company has already started a search process for the next CEO. Between Jan. 31 and the appointment of a new permanent CEO, CFO Meghan Frank and CCO André Maestrini will serve as interim co-CEOs.

Buy Lululemon stock before things get better

The nature of product development cycles means that there's little chance of improvement in Lululemon's results in the Americas until around mid-2026, after the new spring styles have been launched. While the company is introducing more new styles than usual, it's difficult to say whether this will be enough to turn growth around next year. If the next CEO doubles down on this strategy, 2027 could be a comeback year for Lululemon.

Lululemon's biggest strength is its brand. Some damage has certainly been done over the past two years, but nothing that's irreparable. By bringing new styles to market and more effectively competing with a growing number of competitors, Lululemon can begin the process of winning back customers next year.

Lululemon expects to produce earnings per share between $12.92 and $13.02 in 2025, with the bottom line negatively impacted by tariffs. Based on the current stock price, Lululemon trades at a price-to-earnings ratio of less than 16. Considering earnings are depressed by both tariffs and declining sales in the Americas, significant earnings growth is possible once Lululemon gets its product development strategy in order.

While Lululemon stock isn't as cheap as it was a few months ago, a new CEO could help change the narrative and drive a major rally. For long-term investors with some patience, Lululemon appears to be a compelling turnaround play.

Timothy Green has positions in Lululemon Athletica Inc. The Motley Fool has positions in and recommends Lululemon Athletica Inc. The Motley Fool has a disclosure policy.