Peloton Interactive (NASDAQ: PTON) has been in flux for a while, and the situation doesn't seem to be improving. There may be a solid business tucked into it, but it's been struggling to scale, and its new CEO is already out.
There's always the chance for a turnaround, but I wouldn't invest in Peloton right now. Instead, I'd go for a different fitness stock that's also down right now -- Lululemon Athletica (NASDAQ: LULU) . Here's why.
Peloton's problems are deep
Peloton is a leader in connected fitness, but it's been struggling to grow and produce profits. It had the fortune to become a public company almost immediately prior to the onset of COVID-19, leading to surging sales and enthusiastic investors. But as a young and inexperienced company, it made some mistakes too big to easily walk back.
Revenue decreased 3% from last year in the 2024 fiscal third quarter (ended March 31). It was the ninth consecutive year-over-year decrease, and it was slowing down for a while before that. The company briefly became profitable at the height of the pandemic, but it's been reporting losses for years now. It's been in crisis mode for some time.
There were too many problems that all converged into one big fiasco. There have been product recalls, too much building out of infrastructure, low inventory, and more. Peloton hired an experienced CEO to take over two years ago, but he left in May.
There have been many rumors of Peloton being an acquisition target, but for now, management is continuing to try to revitalize the brand with cost-cutting and new initiatives.
Lululemon's problems are shallow -- for now, at least
Lululemon reported excellent results in its fiscal 2024 first quarter (ended April 28). Revenue increased 10% year over year and earnings per share (EPS) were up from $2.28 to $2.54. It's guiding for similar results for the full year. Management noted on its earnings call that it made some product mistakes in the quarter, specifically with color. That didn't dampen enthusiasm about its merchandise from its loyal fans, and the company was responsive.
However, last week Lululemon pulled its new "Breezethrough" collection from stores after customer complaints. Its stock was downgraded by an analyst, and that comes on the heels of a worrisome report from Nike about the state of retail activewear that had already sent Lululemon stock down.
Several news outlets noted that the collection is no longer on the company's website. Instead of marking down the products, it removed them entirely. That protects its branding and image from a promotional environment that could drag out the story and water down margins.
The likelihood is that Lululemon takes the short-term hit for the long-term gain. You might see the Breezethrough debacle come off the income statement as a loss, but it's out of the way, and management hopes, out of peoples' minds.
When something similar happened with Lululemon's "see-through" leggings more than 10 years ago, an executive left, and Lululemon came around pretty quickly. It's interesting that Sun Choe, who has been the chief product officer at Lululemon for almost eight years, has already announced her leave. The company didn't announce a replacement, but rather has a three-person team with varied responsibilities taking over parts of her job.
It could be concerning that Lululemon has several product misses at the same time. It's facing increased competition from the likes of Alo Yoga and On Holding in addition to the regular competition from other premium brands, and in this economy, from lower-priced knockoffs. If it makes too many missteps, it could get into more serous trouble.
Lululemon keeps beating the market
In general, I would do a comparison of growth, profitability, and valuation between two stocks. But the differences here are obvious and massive. Let's just say Lululemon is growing, highly profitable, and cheap, while Peloton is declining, unprofitable, and so cheap it's in danger of disappearing. I'd put Peloton in the value trap category and Lululemon in the bargain bin.
I can't guarantee you that Lululemon will fix its problems tomorrow and that its stock will rebound overnight, but it's still reporting and expecting double-digit sales growth and strong margins.
I also wouldn't bet that Peloton's business is over. It has millions of happy and loyal fans who love its products, and it has made some progress in key areas.
However, Lululemon has a long track record as a winning company with a market-beating stock. At the current price, it's trading at just about its lowest levels in 10 years, and it looks like a great time to buy shares.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica, Nike, and Peloton Interactive. The Motley Fool recommends On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy .
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