Oh, how the mighty have fallen. Since hitting a record of $511.29 at the end of 2023, share prices of Lululemon Athletica (NASDAQ: LULU) have cratered 44%. This is despite the S&P 500 generating an impressive 18% total return during the same period.
To be clear, this apparel stock has still been a massive market outperformer in the past decade (up 650%). However, investors have become pessimistic about the state of the business.
What’s the best course of action? Should you buy the dip in this growth stock? Let’s assess both the bear and bull arguments for Lululemon and see if an answer presents itself.
The apparel industry makes it hard for Lululemon to sustain success
Lululemon is known for selling high-quality athletic and lifestyle apparel at premium prices. This has positioned it well historically. But the intensely competitive nature of the apparel industry is hard to ignore. There are no barriers to entry. This means that anyone with an idea and access to capital can start designing and selling clothing, which has become even easier with the advent of the internet.
Moreover, consumers have zero switching costs. They are free to be as loyal or disloyal as they please, spending their money on whatever clothes or shoes they like at any given time.
It’s also worth mentioning just how difficult it is to find sustained success in this industry. Consumer tastes seem to always be changing. I’m not sure anyone could’ve predicted the resurging popularity of looser clothing these days.
In Lululemon’s case, it faces stiff competition across the board, from industry heavyweights like Nike and Adidas to smaller rivals like Vuori and Alo Yoga. This just means that the business must stay on top of its game in terms of product innovation. During the latest fiscal quarter (Q1 2024 ended April 28), Lululemon’s sales rose 10% year over year. While a healthy gain in its own right, that represented a slowdown from previous quarters. Perhaps the market thinks that Lululemon’s days of dominance are over.
There are reasons to be bullish about Lululemon
I fully accept and understand the…
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