Lululemon Athletica (NYSE:LULU) stock has traded sideways over the past two months as investors await greater clarity on the company’s turnaround strategy ahead of Heidi O’Neill’s transition to CEO.
Shares have also been pressured by ongoing executive turnover, with the Chief Strategy Officer becoming the latest departure. Attention now turns to the company’s upcoming earnings report, which should offer fresh insight into how the turnaround is progressing.
Lululemon Earnings Come as its Valuation Has Slumped
The upcoming earnings report comes at a time when its valuation metrics have brought it to a bargain zone. It trades with a forward price-to-earnings ratio of 11, lower than the consumer discretionary sector median of 16 and its five-year average of 25. According to FactSet (NYSE:FDS), the forward 12-month multiple of the S&P 500 Index is 20.
Lululemon is trading at a bargain multiple for good reasons. Its revenue growth has slowed, including in China, its fastest-growing market. The most recent results showed that its revenue rose by 4% in Q1 to $2.5 billion, with its Americas segment falling by 4%. Its income from operations fell by 37% during the quarter.
The upcoming earnings report is also expected to show that its revenue struggled in Q2. It is expected to come in at $2.46 billion, down by 2.60% from the same period last year.
The company has also had several major issues. Executive turnover has increased as it grapples with its slowing business. Calvin MacDonald exited the CEO role in January, leaving the company under Meghan Franck and Andre Maestrini as the co-CEOs. Heidi O’Neill will become the CEO on September 8.
Other senior executives who have left recently include Rachel Achesen (Chief Strategy Officer), Bill Chandler (Chief Communications Officer), Ranju Das (Chief AI and Technology Officer), Julie Averil, and Celeste Burgoyne. Historically, this level of executive turnover has been a red flag for investors.
Lululemon’s Turnaround is Possible, But Will Take Time
O’Neill’s appointment as CEO has also been a major issue among investors since she comes from Nike (NYSE:NKE), a company whose growth has deteriorated in the past few years. Its stock has slumped by over 75% from its all-time high.
Still, history shows that turnarounds are achievable. A good example of this is Target (NYSE:TGT), a retailer whose stock was in perpetual decline. Today, it has more than doubled from its lowest level in December last year, and is at its highest level since 2014. This rebound happened as its business returned to growth.
Another good example is General Electric, which was on the verge of collapse a few years ago. Under Larry Culp, he separated its business into three: GE Aerospace, GE Healthcare, and GE Vernova. Today, each of these companies are thriving.
The same is possible for Lululemon, a company with solid brand recognition and several potential approaches to grow. This turnaround, however, will likely take time as the new CEO steps in.
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