Why is famed investor Michael Burry going long on Lululemon Athletica (NASDAQ: LULU)? The guy who was one of the inspirations for the book and later the film “The Big Short” says it’s because the stock for this upscale athletic apparel retailer and manufacturer has been oversold and is now a bargain, according to recent statements in his newsletter, Cassandra Unchained.
Whether he’s right largely depends on whether you believe in a good comeback. The maker of luxurious leggings and athletic apparel is apparently getting some pushback among consumers for allegedly being elitist, and sales have been slowing for some time. In a time when many consumers are feeling pressure to tighten their purse strings, discretionary spending on goods made by Lululemon suffers.
Tariff pressure, lower margins, and declining consumer sentiment have plagued Lululemon, dragging the stock down by more than 50% year to date. The stock is currently trading at a low price-to-earnings ratio of 12.45.
However, Lululemon is showing signs of life. The brand is expanding into men’s apparel, opening stores internationally, and maintaining a loyal following. There is increased competition from alternatives like Alo, Vuori, Athleta (owned by The Gap, Inc.), and Fabletics, so Lululemon needs to recapture the magic it once had among athleisure consumers. It looks like the retailer’s best chance to do just that is going to be outside of the United States. In its latest quarterly earnings, the athleisure company reported 22% year-over-year growth in international markets, but just 1% at home in the United States.
If Lululemon is successful in diversifying its apparel offerings and expanding to a global market, perhaps Burry will be correct in his assertions about the stock. For investors willing to hold on for at least a few more years, Lululemon has a real shot at getting back into shape.
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Catie Hogan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. The Motley Fool has a disclosure policy.
Is LULU a Buy Right Now? was originally published by The Motley Fool
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