Down 23% this year, is Lululemon Athletica stock a buy?

Short-term returns can quickly turn negative for any stock, but this is especially true for stocks that soared before the bad news broke. That’s a tough situation. Lululemon Athletica (Lulu 0.86%) Situation faced by shareholders recently.

The stock rose ahead of the company’s fiscal fourth-quarter earnings report on March 21, but then fell sharply following the announcement. The stock is now tracking the performance of the broader market over the past year after roughly doubling. S&P 500Before that report came out, we had a 30% gain.

There were several good reasons for the decline, primarily related to the weakening retail sales environment in key US markets. But let’s take a look at whether investors are overreacting to that failure, potentially making the stock a great buy in 2024 and beyond.

A tough quarter ahead.

Lululemon reported solid results as it began its new fiscal year. However, there are signs that demand may be slowing heading into 2024. Comparable store sales increased 12% in the fourth quarter ending in January, a slight slowdown compared to a 14% increase in the previous quarter.

Management said on a conference call with investors that shoppers’ spending declined during the key holiday shopping season. “There has been a recent shift in consumer behavior and we are off to a slow start to the year in this market,” said CEO Calvin McDonald.

The change will hit the fiscal first-quarter period, which would deliver about 9% year-over-year growth, executives warned. Investors haven’t seen Lululemon expand sales by single-digit percentages since the beginning of the pandemic, so it makes sense that the stock will give back some of the huge gains the market has made over the past year.

Business still strong

Sales trends will pick up as the industry comes back strong, but the bigger question is whether Lululemon will take a big financial hit from the slowdown in early 2024. With this score, the team entered the season with excellent momentum. The gross profit ratio also jumped from 55% of sales to 58% last year, and the operating profit ratio also jumped from 16% to 22% of sales.

The win nearly doubled profits to $12.20 per share, a rarity in the world of retail. “Our solid results demonstrate the strength and resilience of our Omni operating model and our differentiated position in the marketplace,” CFO Meghan Frank said in her press release.

wait?

Frank and her team said first-quarter financial results would be unusually weak. Management expects profitability to decline along with slower sales performance before rebounding over the next few quarters and throughout 2024.

These forecasts set up a risky period for shareholders as they watch for signs of stabilizing sales while also bracing for the possibility of a further slowdown. The good news is that retailers aren’t significantly exposed to industry downturns. Despite increasing gross margin, we were able to reduce inventory by 9% last quarter. This success reflects our impressive pricing power in a highly competitive market.

Risk-averse investors may want to watch the stock from the sidelines if they are worried about its short-term prospects. But Lululemon’s multi-year growth plans have remained largely the same. We also enjoy industry-leading profitability and have great opportunities to expand these margins over the next few years through new product launches and entry into additional product categories.

As a result, investors could see significant long-term returns by owning this growth stock, which has seen recent declines, despite the potential volatility that could occur for the remainder of 2024.