Lululemon Stock Sinks on Outlook, but Is It Time to Buy the Dip?

2024 was not a good year for apparel specialist Lululemon Athletica (NASDAQ: LULU) investors, and 2025 is not off to a good start. The stock price fell around 25% in 2024 and is trading down more than 26% to start this year following the company's most recent earnings report and guidance release.

Investors have been worried about changing fashion trends and Lululemon's growth after some earlier missteps, including the disappointing summer 2024 launch of its Breezethrough leggings, which were aimed at hot-yoga enthusiasts.

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Let's dive into its latest earnings report to see if the stock can come back in fashion.

Solid result, but cautious guidance

Despite the big decline in its stock price, Lululemon actually turned in solid quarterly results. However, the athleisure apparel producer issued cautious guidance, noting uncertainty over the economy and geopolitical tensions. Lululemon is a Canadian company and there has certainly been unprecedented tension with the threat of U.S. tariffs, as well as the U.S. making unwanted overtures toward Canada about becoming the 51st state.

Lululemon said it conducted a consumer survey earlier in March that showed U.S. households were spending less due to fears over the economy and inflation. It said its study revealed slower traffic to companies in this industry segment, including its own.

However, the company said consumers were responding positively to new product launches and other innovations. Earlier in 2024, the company blamed a lack of newness with colors, prints, patterns, and silhouettes in its women's lines as being a drag on its results. So the recent customer response is a positive development.

Meanwhile, location expansion remains a big part of the company's growth plans. It opened 18 net new stores and completed 16 store optimizations in the quarter, bringing its total store count around the globe to 767. It plans to grow its square footage by 10% this year, with new store openings across the world. Some will be company-owned, while markets such as Denmark, Belgium, Turkey, and the Czech Republic will be under a franchise model.

Turning to the results themselves, Lululemon grew its fiscal fourth-quarter revenue by 13% year over year to $3.61 billion. Excluding an extra week in the period, which ended Feb. 2, revenue was up by 8%. Adjusted earnings per share (EPS) rose by 16% to $6.14. That topped the analyst consensus for EPS of $5.85 on sales of $3.57 billion.

Revenue surged 38% year over year, driven by international markets. China was particularly strong, with sales jumping 46%. International same-store sales soared 20% and were up 26% in China.

Its home market of Canada was also solid, with revenue rising 11%. The U.S. lagged with revenue up 5%. Comparable store sales in the Americas were flat in the quarter.

Lululemon's mens category outperformed, with revenue growth of 12%, excluding the extra week. Womens sales increased by 6%, while accessories sales rose by 9%.

Image source: Getty Images.

Gross margin remained strong and edged up 100 basis points to 60.4%. This shows the company is still selling its merchandise at full price and has not had to become overly promotional. Inventory levels also appear to be in pretty good shape. They were up 9% year over year, which was below the 13% increase in sales in the quarter. The company said it was happy with both its inventory level and composition heading into spring.

Lululemon forecast fiscal 2025 revenue to be between $11.15 billion and $11.3 billion, representing growth of 5% to 7%. Excluding last year's extra week, sales growth would be between 7% and 8%. It projected EPS to range from $14.95 to $15.15. The company expects gross margin to contract by 60 basis points due to higher fixed costs, foreign exchange rates, and tariffs.

For fiscal Q1, it is looking for sales of between $2.335 billion and $2.355 billion, good for growth of 6% to 7%, and adjusted EPS of between $2.53 and $2.58.

Should investors buy the dip?

While Lululemon's same-store growth in the U.S. has been lackluster, I don't see much evidence of the company facing any major brand issues. It hasn't been heavily discounting and its inventory is in solid shape. Meanwhile, it looks like new introductions are resonating with customers.

At the same time, the company is still expanding its store base and it's been seeing strong growth in international markets. The growth coming from China is particularly encouraging given how large that market is.

Lululemon now trades at a forward price-to-earnings (P/E) ratio of around 19.5 times based on the company's guidance. That's much cheaper than the 30 times forward P/E struggling Nike trades at currently.

While I don't think investors need to rush in to buy the stock, I think Lululemon should be a solid investment over the long run.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.