Throughout 2019, the fiscal outlook was rosy for lululemon (NASDAQ:LULU) stockholders. Those were the good old days, before the spread of the novel coronavirus left the American retail sector in disarray.
Informed investors need to think of time as divided into two distinct sections: before Covid-19, and after. You can’t afford to trade as if we’re living in a pre-Covid world anymore. This is true for all economic sectors but applies with particular urgency to the retail space.
And it’s not just about social distancing, though that is a factor to consider. Nor is it about supply-chain issues, for that matter. The main issue is the consumer, who is in no mood to splurge on fancy athletic wear even if he or she can afford it.
Remembering the Good Times
It’s a fun exercise to reminisce about happier times in the past. The problem is that nostalgia can cloud our judgment. 2019 wasn’t long ago chronologically, but given how different the world is now, it might as well be centuries apart from 2020’s second quarter.
Unfortunately, LULU stock bulls may find encouragement in the company’s most recent financial report, which doesn’t reflect the full impact of the coronavirus. Indeed, lululemon’s fiscal fourth-quarter 2019 earnings commentary and summary infographic are little more than quaint reminders of a more placid and abundant time.
Let’s rewind the clock for a moment and relive the pre-corona euphoria of just a few months ago:
“Total [fourth-quarter] net revenue increased [year-over-year] 19.7%… Gross profit was $810.8 million, or 58.0% of net revenue, compared to $668.6 million, or 57.3% of net revenue, in Q4 2018… We opened 12 net new company-operated stores in Q4 2019 including six in Asia, four in North America, and two in Europe.”
Good times, right? Too bad they couldn’t last. The stock market is forward-looking, and with the American retail sector in shambles now, no one’s expecting Lululemon to post numbers comparable to Q4 2019’s blockbuster stats anytime soon.
The Emperor’s New Clothes
The financial press has provided ample coverage surrounding the departure of Lululemon CFO Patrick Guido. That’s understandable, since this marks a significant event in the company’s evolution.
On the other hand, a strong argument could be made that the media is missing the bigger picture at this point. The search for a new CFO is immaterial if lululemon doesn’t survive the current financial crisis.
With so many Americans unemployed or underemployed now, the consumer-discretionary sector is under tremendous pressure. The retail space could be in dire straits for the remainder of the year or longer.
Stifel managing director Michael Kollender offered a part-analysis, part-weather report when he pithily declared that “We are in a retail tsunami.” That’s an apt summary and investors need to seek shelter from the storm, not drive headlong into it.
In a similar vein, Michael Baker, a retail analyst from Instinet, suggested that J. C. Penney (NYSE:JCP) could be close to bankruptcy. Oliver Chen, a retail analyst with Cowen, similarly opined that “survival is a big question” for J. C. Penney.
One would think that lululemon would respond accordingly, but the evidence of this is lacking. The lululemon catalog is a throwback to 2019, with an $118 “In the Moment” shirt and $128 “Fast and Free” running pants.
Those titles suggest spontaneity, but that’s completely out-of-touch in a time when the public does not feel like splurging with its money. If Apple (NASDAQ:AAPL) is willing to reduce its latest iPhone price to $399, lululemon should follow suit and make its apparel more affordable.
The Takeaway on LULU Stock
To be blunt, lululemon’s products are overpriced and, therefore, so is LULU stock. Until America gets its fiscal groove back, extravagance – like last year’s running pants – is decidedly out of fashion.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
