Despite the stock market reaching new heights, numerous industries are home to undervalued stocks that could thrive as the economy improves in the next five years.
Krispy Kreme (DNUT 2.55%) has seen its stock plummet by 67% in the past year due to disappointing financial outcomes. However, the stock has the potential to increase significantly if management’s strategies to enhance profitability succeed.
Lululemon Athletica (LULU 0.30%) is currently 57% below its recent highs, attributed to slower growth and increased competition. Nonetheless, the latest financial results suggest that the brand is in a stronger position than the market perceives.
1. Krispy Kreme
Krispy Kreme’s stock has not performed well lately. Earlier this year, it experienced a steep decline following underwhelming revenue and earnings reports. Additionally, the decision to halt dividend payments to shareholders has exacerbated the company’s challenges. This situation highlights the urgent need for the company to reduce its debt and improve profitability.
In its latest quarter, Krispy Kreme reported a $33 million loss on $375 million in revenue, representing a 15% decline compared to the same period the previous year. The leadership has undergone restructuring, aiming to expand the number of locations where customers can buy doughnuts. The company increased its global points of access by 21% year-over-year, reaching 17,982 locations, with a future goal of 100,000.
2. Lululemon Athletica
Over the past 15 years, Lululemon has generated market-beating returns as its brand became a mainstream leader in a rapidly growing industry. Some investors may believe Lululemon is past its peak, but with $10.7 billion in trailing 12-month revenue, its share of the athletic apparel market remains small, indicating significant growth potential that is not reflected in its stock price.
In the last decade, numerous new competitors have emerged, yet Lululemon maintained revenue growth exceeding 20% annually until recently. Even with a crowded market, it has held its own against industry giants like Nike and Adidas. The main obstacle has been the economic landscape, which has impacted sales across the sector more severely for Nike than for Lululemon. Last quarter, Lululemon’s revenue grew by 7% year-over-year, while Nike experienced a decline.
Lululemon’s strong brand is reflected in its gross margin of 58.3% for fiscal Q1 2025, up from 57.7% in fiscal Q1 2024. In an environment of increased consumer spending, Lululemon’s premium positioning is poised for strong growth. With $1.3 billion in cash and no debt, the company is well-equipped to navigate slow sales trends and potential tariff challenges on imports.
The stock is priced at just 15 times this year’s expected earnings, suggesting analysts anticipate continued healthy profits for Lululemon. This price point presents a bargain for a company branching into new categories such as footwear and eyeing international expansion. A blend of earnings growth and an increased price-to-earnings ratio may enable the stock to at least double by 2030.
