A weak retail environment has been a headwind for many consumer brands this year. Celsius Holdings (NASDAQ: CELH) and Lululemon Athletica (NASDAQ: LULU) are two stocks that have fallen well off their highs after posting disappointing financial results. Here's why these "fallen angels" can return to growth and potentially deliver excellent returns to investors.
1. Celsius Holdings
Shares of Celsius were recently trading at $29.31 after hitting a high of $99.62 earlier this year. The company's revenue soared in 2023 following its distribution agreement with PepsiCo the year before. But a recent decline in revenue sent the stock tumbling. However, a closer look reveals it is just a temporary bump in the road that gives long-term investors a great buying opportunity.
After reporting a year-over-year revenue increase of 37% in Q1, and 23% in Q2, revenue fell 31% in Q3. It's a surprising reversal for a company that has been experiencing strong demand in the energy drink market, but the revenue shortfall doesn't reflect on the company's brand. The lower revenue was caused by supply chain adjustments by the company's largest distributor, which management says has stabilized.
Management continues to focus on expanding the business through the foodservice channel, e-commerce, and international markets. Despite a challenging retail environment, Celsius' retail and unit sales increased 7% year over year in the quarter. This outpaced the sales growth across the energy drink category, which grew only 2% and suggests that Celsius is still a category-defining brand in the making.
On a price-to-sales basis, the stock's recent 4.8 multiple is the cheapest it has been in four years. Once the company's revenue is growing again, which could happen next year based on Wall Street's consensus estimate that has Celsius posting a 16% increase in 2025 revenue, investors stand to earn outstanding returns from these lower share prices.
2. Lululemon Athletica
The athletic apparel market has fueled strong growth over decades for leading brands like Nike, and Lululemon Athletica appears to be the next in line. Even after the recent collapse in Lululemon's share price, the stock is up 610% over the last 10 years, which is triple the return of the S&P 500 (SNPINDEX: ^GSPC).
Lululemon's revenue grew just 7% year over year in the July-ending quarter, a notable drop from the company's 20% annual average over the last decade. But that's still superior to industry leader Nike, which posted a revenue decline of 10%. Lululemon is still demonstrating it has a loyal base of customers who are willing to pay premium prices for its products.
While Nike has been around for half a century, Lululemon has only been around for a few decades. It has just started to expand beyond apparel into new products like footwear in recent years. International revenue grew 29% year over year last quarter. This high rate of growth indicates there are still abundant opportunities for the brand to expand globally.
Investing in top brands when consumer spending is down can help you boost your returns when the economy is firing on all cylinders again. Lululemon posted growth of 19% last year and should have several more years of double-digit growth ahead. With the stock trading at a forward price-to-earnings ratio of 23.8, investors could also earn double-digit annualized returns over the long term.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius, Lululemon Athletica, and Nike. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
