Lululemon Stock Floods After Nike News: Why It Could Be a Great Time to Buy

Nike (NYSE:NKE) reports quarterly earnings on a different schedule than most public companies, and its updates often give the market a sense of what’s happening in retail before other earnings announcements. Because Nike plays such a strong role in the retail scene, its results can be a harbinger of things to come. For example, in late 2021, it was Nike that gave some of the earliest signs of a supply-chain crisis that ultimately ripped through retailers and rocked the economy.

It is no wonder that after Nike’s disturbing report from the end of June, investors became pessimistic about other companies as well. Lululemon Athletica (YOU SHINE) -5.24%)one of Nike’s main competitors over the past few years, has shown resilience and has not changed its outlook, but its shares are down 17% since Nike’s update. Is there anything to worry about? Or are Lululemon stock flashing a big buy signal?

Is what’s bad for Nike bad for Lululemon?

Nike’s fiscal fourth-quarter 2024 update (ended May 31) had two sides. One was negative news about its own business, and the other was negative news about retail in general. Most of the issues were related to its own business, but management cited “macroeconomic uncertainty” as an ongoing concern. Nike has been hit particularly hard by ongoing pandemic-related issues in China, where the company has been running a heavy promotional push to clear inventory. It has a broad strategy targeting several areas to drive higher sales and increase margins.

It’s a tough time for Nike, which appeals to a wide range of demographics. Inflation is causing mass-market consumers to cut back and may switch to cheaper brands, while affluent shoppers may be more receptive to new, upscale brands like the fast-growing While holding or by athlete-focused brands such as Brooks (owned by Berkshire Hathaway).

But is this another sign of what lies ahead for other major sports brands?

Are things starting to get tough?

Lululemon’s latest update was for the first quarter of fiscal 2024, which ended April 28, a period similar to Nike’s fourth quarter. Revenue rose 10% year over year, and gross margin rose 0.2 points to 57.7%. Operating margin fell 0.5 points, but earnings per share rose from $2.28 to $2.54. Overall, it was a good quarter.

Management cited some of its own challenges this quarter. It said things started off slowly because of a few missed opportunities related to colors in women’s apparel and handbags, as well as a tight selection and low inventory of some core products. But the company’s leaders felt they had the situation under control and were correcting it. The market seemed to have no objections to management’s update, and Lululemon shares were steady after the report.

Lululemon has a few advantages that Nike doesn’t. For example:

• The company does not have a large international footprint, where it is growing faster than in the U.S. International sales are up 35% year-over-year, and generating higher international sales is an integral part of the company’s growth strategy.
• It is also positioned and priced as a more exclusive brand than Nike, and its wealthier target market is more resistant to inflation.

Recently, however, Lululemon has made another announcement about a product problem. It is halting sales of a new line of products featuring a fabric called Breezethrough because customers find the patterns unflattering. (I would note, to Lululemon’s credit, that the product was not released until early July.) That’s a pretty quick response to customer feedback. It’s not the first time Lululemon has made a mistake with a new product, but the company rebounded then, and it should rebound now.

That, as well as past product issues and a dynamic operating environment, prompted a downgrade from Wall Street analysts and Lululemon shares fell further.

Time to buy Lululemon stock?

At its current price, Lululemon shares are trading at a P/E of 20, which is almost as low as Nike (and almost its lowest in 10 years), even though the company is growing much faster, has stronger direct-to-consumer sales, and boasts significantly higher gross and operating margins.

LULU P/E data according to YCharts.

Lululemon seems to be in a strong position right now, and at the current price, that could be seen as a bargain. Investors should go in with their eyes open and understand the context in which Lululemon is operating right now — I’m not erasing its challenges. But it’s doing well under pressure and has many of the qualities you’d expect from a great long-term ownership.

There’s a chance Lululemon stock will continue to fall, and it will if the company doesn’t meet Wall Street’s expectations in its next quarterly update. But you can’t predict the market, and if the company meets its guidance, the stock will start a new rally. As long as you can handle the potential short-term volatility, now is a great time to buy Lululemon stock.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Lululemon Athletica, and Nike. The Motley Fool recommends On Holding and recommends the following options: long January 2025 $47.50 call options on Nike. The Motley Fool has a disclosure policy.