It's not often that a yoga festival becomes a stock market story, but that's exactly what’s happening to Lululemon Athletica Inc (NASDAQ: LULU) right now. The activewear giant arranged a large-scale promotional event on a section of the Great Wall of China near Beijing in late May, complete with thousands of attendees, Chinese celebrities, and what was meant to be a traditional drum performance. The trouble is that the drum used reportedly wasn't Chinese at all. It was Japanese, and Chinese social media has not been gentle about it.
The backlash on the Chinese social media platform Weibo has been substantial, with the related discussion topping tens of millions of views, and the company forced to issue an apology. Considering that China has been one of the most important growth markets for Lululemon over the past few years, this is the absolute last thing the stock needed. The shares were already deep in the doghouse, and a public misstep like this only deepens the sense that everything that could be going wrong for Lululemon is.
However, for those who can step back and look at the bigger picture, this might be exactly the kind of moment that long-term bulls will look back on with a wry smile.
A Stock That's Been Badly Beaten Up
This latest gaffe in China didn't cause the selloff in Lululemon, but it has added to one that's been quietly grinding away since late 2023. Shares are down close to 50% year to date, having hit a fresh low earlier this month, and are trading at roughly the same level as eight years ago.
For a brand that was, not so long ago, one of the great growth stories in consumer retail, that's a stunning reversal of fortune. The interesting part is that this collapse has not been driven by an underlying business that's falling apart. Lululemon has continued to exceed analyst expectations for both earnings and revenue in recent quarterly reports, including its latest earlier this month.
The problem, instead, has been an overall deceleration in growth and consistently soft forward guidance. Each quarter has come with a slightly weaker outlook than the market wanted to hear, and that sense of deceleration is what has truly done the damage. When a stock is priced like a growth name, but then stops growing like one, the re-rating can be brutal.
The Valuation Tells Its Own Story
But here's where it gets interesting for those willing to look past the noise. Lululemon's price-to-earnings (PE) ratio is currently below 10, the first time it's been at that level in more than a decade. For a profitable, cash-generative, globally recognized brand with a still-growing footprint in some of the world's largest markets, that multiple is starting to feel like a bargain.
Compared with Lululemon's peak valuation, the current valuation is almost unrecognizable. That's not because the business has structurally broken, but because the market has gone from extreme optimism to extreme pessimism. The truth, as is so often the case, is likely somewhere in the middle. And for patient investors, the middle is exactly where the outsized opportunities tend to live.
Even the Cautious Voices Imply Upside
Arguably, the most striking point about Lululemon's current setup is what the cautious analysts are saying. Sure, much of the recent commentary has been distinctly downbeat, with some calling the company a "rudderless ship in increasingly choppy seas," and there's a sense that not much will change until the new CEO, Heidi O'Neill, takes the helm in September.
However, even with all of that skepticism baked in, Lululemon's consensus rating of Reduce may not tell the full story. The recently refreshed price targets from the more cautious firms still imply upside from current levels. The likes of Daiwa Securities, Deutsche Bank, and Bank of America, for example, each rate Lululemon a Hold or equivalent and set targets ranging from $120 to $140, comfortably above where the stock is currently trading at around $110. Tie that in with the rock-bottom valuation that the stock’s currently trading at, and you have the kind of setup that's hard to ignore.
A Risk-Reward That's Starting to Tilt
To be sure, this still isn't a stock for the faint-hearted. There's a genuine possibility that things could get worse before they get better, particularly if the China headwinds intensify or if O'Neill's arrival sparks further strategic changes that need time to bed in. The market will likely remain unforgiving until there's hard evidence that the deceleration story has finally hit a floor.
But the patience here may eventually be rewarded handsomely. The China gaffe is the kind of headline that scares short-term traders out of a stock and lets long-term bulls quietly begin building positions. While the rest of the market is busy pointing and laughing at a misplaced drum, the smarter money may be paying closer attention to what comes next.
The article "Lululemon’s China Backlash May Be Hiding a Bigger Valuation Story" first appeared on MarketBeat.
