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Concerns about weakness in its core U.S. market have alarmed Lululemon investors.
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Target’s financial performance is being impacted by tariffs and cautious consumer behavior.
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Both companies are trading at low valuations that reflect negative sentiment, potentially overlooking important positive factors.
Lululemon Athletica (NASDAQ: LULU) and Target (NYSE: TGT) have both lost popularity on Wall Street following a challenging 2025. Lululemon has revised its outlook due to decreased demand in the U.S. and rising trade costs affecting its profits. Target faces weakened discretionary spending and tighter margins as consumer caution continues and tariffs further impact its results. As of now, both stocks have fallen over 40% in the last year.
However, looking closely at both retailers reveals some potential upsides in their recent reports, as well as proactive strategies from their management teams to address ongoing challenges. Lululemon remains a strong global brand with increasing engagement in markets like China, while Target is seeing growth in its digital services and advertising segments. Overall, both companies are evolving their strategies rather than remaining stagnant.
In Lululemon’s second quarter of fiscal 2025 (ending August 3), the company displayed both challenges and resilience. Revenue grew by 7% to approximately $2.5 billion, with comparable sales increasing by 1%. Regionally, U.S. revenue experienced a minor increase of 1%, while international sales soared by 22%. However, earnings per share dipped to $3.10 from $3.15 in the same quarter last year, prompting management to lower full-year expectations and emphasize the need for stronger U.S. offerings and a faster introduction of new products.
Lululemon’s management has focused on initiatives that drive positive outcomes. They are refreshing underperforming lifestyle categories, optimizing product life cycles, and managing pricing to handle increased costs from tariffs. International expansion remains strong, supported by new stores and growing brand recognition, notably in China. With the stock now priced at only 11 times earnings post-selloff, there’s potential for earnings recovery if U.S. market trends stabilize and international growth continues.
Target, with nearly 2,000 locations, reported underwhelming quarterly results for fiscal Q2 (ending August 2), where net sales fell by 0.9% and comparable sales dropped by 1.9%. Nonetheless, several key indicators showed improvement. Management noted significant enhancements in traffic and sales compared to the previous quarter. Additionally, digital sales grew by 4.3%, driven by substantial demand for same-day services. Non-merchandise revenue, primarily from advertising and subscriptions, increased by 14.2%, providing high-margin income.
Looking ahead, Target’s management has maintained expectations for low single-digit sales declines and earnings per share between $8.00 and $10.00. This conservative forecast implies a forward price-to-earnings ratio of approximately 10, highlighting the stock’s undervaluation. Despite existing challenges, Target’s focus on same-day fulfillment could enhance customer loyalty and thereby support revenue growth. The rapid expansion of its high-margin advertising and subscription services is likely to bolster profits without inventory risks. With a 5.2% operating margin in the most recent quarter, there’s potential for improvement, particularly as it remains below pre-2022 levels.
In conclusion, both Target and Lululemon have faced setbacks, yet each is adapting and has strong segments within their business. Lululemon presents a compelling case due to its improved product refresh cycle and robust international growth, while Target’s low valuation combined with its growth in high-margin sectors helps mitigate concerns about weak consumer spending and tariff issues. For investors willing to adopt a long-term view, both stocks appear to offer attractive opportunities at their current valuations.
