Why I'm eyeing Lululemon Athletica again; Don't let politics affect your investing; Falling prices for orange juice and eggs
1) Apparel company Lululemon Athletica (LULU) is back on my radar screen after plunging more than 14% on Friday to close at $293.06...
The company reported fourth-quarter earnings after the close on Thursday, which were decent – revenue rose 8% (adjusted for an extra week of fiscal 2024) and earnings per share rose 16% – but guidance for 2025 was weaker than expected.
This Wall Street Journal article has more details: Lululemon Outlook Misses as Consumer Confidence Falls. Excerpt:
Lululemon Athletica expects sales growth to slow this year, hurt by cautious consumers who are limiting their spending amid an uncertain macroeconomic environment.
The activewear company on Thursday said it expects sales to rise 5% to 7% this year, down from 10% growth in 2024. This deceleration, which according to FactSet would be the company's slowest growth rate on record, comes as both its revenue and profit forecast fell short of Wall Street estimates.
"Consumers are spending less due to increased concerns about inflation and the economy," Chief Executive Calvin McDonald said. "This is manifesting itself into slower traffic across the industry in the U.S. in quarter one, which we are experiencing in our business as well."
But as the article continued:
Still, Lululemon's recent product launches have been well received by customers, McDonald said. And a strong holiday shopping season helped buoy the company's fiscal fourth-quarter results ahead of expectations.
For the current year, the company expects revenue between $11.15 billion and $11.3 billion, the high-end of which is in line with analyst views. It additionally forecast per-share earnings of $14.95 to $15.15, missing the $15.37 that Wall Street modeled.
Regular readers will recall that I wrote about Lululemon with my usual "first look" analysis on August 22. And I dug deeper into the company the next day, when it closed at $268.55 per share.
Soon thereafter, Lululemon turned into a rocket ship... When I wrote an update about it on January 17, the stock had soared by 50% from its lows in September (it ended up closing at $373.70 per share on January 17). As I concluded in that e-mail:
I wouldn't be chasing this stock after such a big move. But it's a great company, so look to buy on weakness.
Well, now we have some weakness – as you can see in this one-year stock chart:
To see whether this pullback might be a buying opportunity, I first checked out Lululemon's inventory. That's often the first place you find evidence of a retailer running into trouble because it generally means that its products aren't selling.
My preferred way to measure this is days outstanding – how many days it would take to sell the existing inventory at the trailing-12-month rate of sales.
In Lululemon's case, the numbers are good: While days outstanding have risen modestly in the past decade – not surprising, as the company has grown, especially internationally – they actually declined a bit from 126 in 2023 to 119 last year, as you can see in this chart:
Free cash flow ("FCF") is another key metric I always look at when a company guides down, to see if it's a warning flag that might indicate future misses.
Again, Lululemon's fourth quarter was solid – in line with the previous year (note that the company, like many retailers, is quite seasonal, generating most of its FCF during the holiday season). Take a look at this chart of Lululemon's cash from operations, capital expenditures ("capex"), and FCF by quarter:
Lastly, let's look at valuation. At $293.06 per share, the stock is trading at about 19.5 times the midpoint of the company's guidance (which was only 2.1% below analysts' expectations).
Such a big sell-off on Friday after such a small miss on guidance I think says more about investors being very worried these days about a recession than about any weakness I can find in Lululemon's business.
So I definitely like the stock today more than I did before it reported earnings. But it's not quite cheap enough where I would want to officially recommend adding it to the model portfolio for our firm's Stansberry's Investment Advisory flagship newsletter.
If it gets to that point where my team and I decide it's compelling enough to pull the trigger, as always, our subscribers will be the first to know. (If you aren't a subscriber already, you can find out how to become one right here.)
2) I've warned many times how important it is to successful long-term investing to separate your political views from your investing decisions...
Democrats who panicked and sold when Donald Trump was elected in 2016 paid a steep price, as did Republicans who did the same when Joe Biden won in 2020.
This advice is even more important today in such a polarized political environment – and it's hard to find a better example of this than looking at what Republicans and Democrats think inflation is going to do in the next year.
Under Biden from 2021 until the election in 2024, Democrats were more optimistic (reflecting their guy in the White House)... but look at what happened the moment Trump won: an immediate, dramatic reversal, as the below chart from this post on social platform X shows:
3) Speaking of inflation, it's good to see the prices of orange juice and eggs falling sharply – take a look at these charts from these recent posts on X:
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.