Do These Beaten Down Stocks Deserve a Closer Look?

Several well-known athletic apparel companies, namely NIKE NKE and lululemon LULU, have seen an extended period of poor share performance, both widely underperforming relative to the general market over the past year.

But can the negativity reverse course? Let's take a closer look at their recent quarterly performance and how their earnings outlooks have shaped up over recent months.

Can NIKE Shares Bounce Back?

NIKE shares have been weak for several reasons, largely unable to impress consumers over recent years due to a lack of innovation and the loss of shelf space. Competitors like Hoka from Deckers Outdoor DECK have really applied pressure, stealing former NIKE customers.

NIKE also largely cut out retailers to push direct-to-consumer (DTC) sales over recent years, but the reduction in shelf space and loss of its overall presence backfired. Still, it has been actively rebuilding its relationships with retailers, but regaining the premium shelf space it once enjoyed isn't cheap.

Additionally, a weak showing in China, once one of its stronger growth engines, hasn't helped sentiment either. Chinese consumers have shifted their preferences toward other domestic brands, further reflective of NIKE's stagnant innovation over recent years.

It's seen little to no sales growth over the past three years due to these factors, as shown below.Zacks Investment Research

Image Source: Zacks Investment Research

While the stock has fallen well off recent highs and could look like an opportunity, the reality remains that it's become cheap for understandable reasons, particularly those listed above. The company's EPS outlook for its current and next fiscal years remains bearish, with the stock also currently a Zacks Rank #4 (Sell).Zacks Investment Research

Image Source: Zacks Investment Research

Lululemon Shares Plunge

LULU shares have similarly faced pressure amid weakening trends in its consumer base, particularly in North America. Quarterly results have put the spotlight on the pressure, with revenues in the broader Americas region declining 3% YoY and comparable sales declining 5% from the same period last year.

Lululemon's YoY sales growth rates were fantastic in recent years before tapering off visibly, with the weak price action fully reflecting the growth cooldown. Please note that the chart below tracks the %YoY change in sales, not actual sales numbers.Zacks Investment Research

Image Source: Zacks Investment Research

The company's actively working to drive improvements in its North America business, still remaining confident of an impending turnaround. Still, it's worth noting that the overall profitability picture has taken a notable hit as well, with LULU's gross margin declining 410 basis points YoY to 54.2% in its latest period.

Story Continues

The profitability hit is quite important to sentiment around the company, as it has typically enjoyed a much stronger margin profile than other apparel companies due to its premium-priced products. The earnings outlook for its current and next fiscal years remains heavily challenged as a result, with the company currently a Zacks Rank #5 (Strong Sell).Zacks Investment Research

Image Source: Zacks Investment Research

Bottom Line

While lululemon LULU and NIKE NKE shares have become much cheaper relative to historical levels over recent years, the reality remains that they've become that cheap for a reason. Company-specific issues have led to weak quarterly results, and share performance reflects those problems.

In other words, stocks that have seen a big decline aren't always reflective of great opportunities. Rather, investors should focus on stocks with strengthening earnings outlooks and favorable trends, such as accelerating sales growth or expanding margins. Both LULU and NKE carry weak Zacks Ranks, and investors would be better off watching from the sidelines until a turnaround is visible in positive earnings estimate revisions.

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This article originally published on Zacks Investment Research (zacks.com).

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