Is Lululemon Athletica a Buy After Its Latest Earnings Report?

Lululemon (Nasdaq: LULU) came into its first-quarter earnings report with investors desperate to see some signs of a turnaround, or at least stabilization.

The business has been in disarray for at least the last year as sales growth in North America, its core market, has stalled, and other headwinds, such as tariffs, have weighed on the bottom line. Former CEO Calvin McDonald was pushed out, and the company now has a pair of interim co-CEOs at the helm until Heidi O'Neill, a longtime former Nike exec, takes over the position in September.

Coming into the report, Lululemon stock was down 40% year-to-date, but investors sent the stock even lower after hours on Thursday, down another 11% as first-quarter results met expectations, but the company cut its full-year earnings guidance. Its second-quarter forecast was also well below the mark.

Image source: Lululemon.

Lululemon's Q1

The pattern from Lululemon's recent quarters continued with weak results in North America as comparable sales fell 5% in the Americas, but comps rose 13% in international markets, helping to make up for it.

Overall revenue rose 4%, or 2% in constant currency, to $2.47 billion, which edged out the consensus at $2.43 billion. Further down the income statement, the athleisure company continued to struggle with gross margin down 410 basis points to 54.2%, though 280 basis points of that was due to negative tariff impact. The remainder was from fixed cost deleverage due to falling comparable sales in North America.

Selling, general, and administrative expenses rose due to higher store labor hours and increased compensation, which led to operating income falling 37% to $276.9 million. Earnings per share declined from $2.60 to $1.69, which topped the consensus at $1.67.

However, the company's guidance was well short of expectations. For the second quarter, it called for a revenue decline of 2%-3% to $2.45 billion-$2.475 billion, a clear slide from the first quarter and much worse than the consensus at $2.59 billion. It also sees earnings per share of $1.76-$1.81, which compares to estimates at $2.69.

For the full year, it sees revenue of $11 billion-$11.15 billion, or flat to a decline of 1%, and calls for earnings per share of $10.95 to $11.15. That compares with the consensus at $11.47 billion in revenue and earnings per share of $12.28.

Is Lululemon a buy?

Lululemon was up against a low bar, and it still came up drastically short.

The company is facing external headwinds, including tariffs, inflation, and consumer discretionary weakness in the U.S., but that doesn't seem to fully account for the company's struggles. Before his departure, McDonald acknowledged that the company had not kept up enough newness in some of its styles and promised to do better by the spring.

Well, the spring has now come and gone with little to show for it. Co-CEO Meghan Frank noted some success with new product launches, but also said there were misses. She promised the company would be bolder in the second half of the year.

Still, it seems like the turnaround is on pause at least until O'Neill arrives, which is still three months away. It's worth remembering that Lululemon stock also tumbled when O'Neill was named the next CEO, so she'll have to work to earn investor trust.

There's not much in the business right now that makes Lululemon a buy, outside of its strong performance in China, but that doesn't mean the stock's dead. It is cheap as well, trading at a forward P/E of 10 based on this year's dialed-down forecast.

Buying the stock now could pay off, but it would require some faith that the company can put the current challenges behind it. I'd prefer to wait until O'Neill takes the helm and makes her strategy clear. If Lululemon can get back to something like the growth stock it's historically been, there's a lot of upside potential, but that's far from a guarantee.

Jeremy Bowman has positions in Lululemon Athletica Inc. and Nike. The Motley Fool has positions in and recommends Lululemon Athletica Inc. and Nike. The Motley Fool has a disclosure policy.