We previously covered Lululemon (NASDAQ:LULU) (NEOE:LULU:CA) (TSX:LLL:CA) in May 2024, discussing how the COVID-19 darling had met painful corrections, thanks to the uncertain macroeconomic outlook, impacted consumer discretionary spending, and intensifying athleisure market competition.

Despite the drastic correction, we believed that bullish support had yet to materialize, with more retracement and uncertainty likely – resulting in our initial Hold (Neutral) rating.

Since then, LULU has further pulled back by -14.6%, compared to the wider market at +6.2%. Even so, we are uncertain if it is wise to upgrade the stock to a Buy, attributed to the lowered FY2024 guidance and the consistently moderating FWD P/E valuations.

Combined with the stock’s lower lows/ lower highs since the December 2023 tops and the mixed innovation/ restructuring efforts, we believe that it may be more prudent to observe its execution for a little longer – resulting in our reiterated Hold rating.

LULU’s Investment Thesis Is Still Expensive Despite The Deep Pullback

LULU YTD Stock Price

LULU has had a painful 2024 indeed, with it underperforming the wider market and its consumer discretionary peers, as the stock returns all of its hyper-pandemic gains.

Part of the headwinds are attributed to the management’s lower than expected FY2024 revenue guidance of $10.75B (+11.9% YoY) and adj EPS guidance of $14.10 (+15.5% YoY) offered in the FQ4’23 earnings call, worsened by the tougher YoY comparison at +18.4% and +26.8% in FY2023, respectively.

This phenomenon has already triggered the sharp pullback observed by end March 2024, as the LULU stock loses bullish support attributed to the implied end of its high growth trend, compared to the normalized growth rate at a historical CAGR of +22.3% and +29.1% between FY2016 and FY2023, respectively.

This development is worsened by the FQ2’24 top-line miss, with revenues of $2.37B (+7.7% QoQ/ +7.7% YoY) and adj EPS of $3.15 (+24% QoQ/ +17.5% YoY).

For example, while LULU has been excited about the Q2’24 launch of Breeze Through in the FQ1’24 earnings call – a new innovation designed for hot, low-impact workouts, and made from a new performance fabric, it appears that the silhouette has drastically “missed the mark.”

With the summer line missing expectations as we enter the colder second half of the year, the management has had to “pausing on sales and look forward to reintroducing the fabric in the future,” with it triggering “a negligible impact on our performance in this quarter” – i.e.: minimal sales boost.

LULU’s Geographical Performance

At the same time, while LULU has reported robust sales growth in China at +3.4% QoQ/ +34% YoY and Rest of World sales growth at +11.5% QoQ/ +23.7% YoY in FQ2’24, it is apparent that its main top/ bottom line driver, the Americas, has underperformed at +7.4% QoQ/ +1.7% YoY.

This is especially since the Americas has usually reported higher profit margins at 38.4% in FY2023, with the expanded promotional events already triggering a moderation to 36.6% in H1’24.

The deceleration in sales growth and headwinds in pricing naturally imply further uncertainty in the retailer’s near-term prospects, given that China and Rest of World typically generate lower profit margins at 34.9%/ 19.7% in FY2023 and 38.6%/ 23.5% in H1’24, respectively.

As a result of the uncertain US market recovery and slower YoY comparable sales growth at +3% in constant currency in FQ2’24 (compared to +7% in FQ1’24 and +13% in FQ2’23), it is unsurprising that LULU has lowered their FY2024 guidance to revenues of $10.425B (+8.5% YoY) and adj EPS of $14.05 (+15.6% YoY) at the midpoint.

These numbers appear to be in line with its H1’24 performance at +8.8% and +14.7% YoY, respectively, implying that the worst may already be baked in – assuming that its “penetration of newness” is able to deliver similar results in H2’24.

For example, the management already sought to fast track its new seasonal designs in new silhouettes, fabrics, colors, and prints for the popular segments, such as performance shorts, tops, and tracksuits – with it potentially allowing the retailer to deliver the “historical levels of newness” by spring 2025.

The Consensus Forward Estimates

The near-term softness is also why the consensus have temporarily lowered their forward estimates, with LULU expected to generate a decelerating top/ bottom-line growth at a CAGR of +9%/ +9% through FY2026, compared to the original estimates of +12.4%/ +13.2%, respectively.

LULU Valuations

And this is also why we believe that LULU remains expensive at FWD P/E valuations of 18.53x, despite the drastic moderation from the December 2023 peak of 37.80x and the 1Y mean of 28.14x – with it remaining to be seen if their ongoing innovation and restructuring efforts may boost its top/ bottom-line growth.

With the stock still reporting a PEG ratio of 1.76x compared to the sector median of 1.46x, NIKE (NKE) at 5.31x, adidas AG (OTCQX:ADDYY) at 1.03x, and On Holding (ONON) at 1.37x, we believe that there remains a minimal margin of safety at these levels.

So, Is LULU Stock A Buy, Sell, or Hold?

LULU 5Y Stock Price

For now, LULU has lost -50% of its value since the December 2023 peak, while continuing to trade below its 50/ 100/ 200 day moving averages despite the recent bounce from August 2024 support levels.

For context, we had offered a fair value estimate of $294.60 in our last article, based on the FY2023 adj EPS of $12.77 and the discounted FWD P/E valuations of 23.07x. This is on top of the long-term price target of $412.40, based on the consensus FY2026 adj EPS estimates of $17.88.

It is apparent by now that those numbers are no longer valid, based on the market’s consistent moderation on LULU’s FWD P/E valuations.

Based on the management’s FY2024 adj EPS guidance of $14.05 and the moderated FWD P/E valuations of 18.53x, it appears that the stock has earned itself an updated (and lower) fair value estimate of $260.34.

The same may be observed in the updated (and lower) long-term price target of $306.60, based on the consensus lowered FY2026 adj EPS estimates of $16.55 and the moderated FWD P/E valuations of 18.53x – with it offering interested investors with a minimal upside potential of +18.8% from current levels.

Combined with LULU’s still expensive FWD PEG ratio, the management’s cautious commentary surrounding the US market, and the uncertain restructuring/ innovation pipelines, we believe that it may be better to observe its execution for a little longer before buying the dip.

We maintain our Hold rating here.