2 Beaten-Down Retail Stocks to Buy and Hold

After a rough 2025, two once-popular retailers on Wall Street have fallen out of favor. Lululemon Athletica (NASDAQ: LULU), the high-end athletic-apparel specialist, recently cut its outlook after weak U.S. demand and higher trade costs pressured profits. Target (NYSE: TGT), one of America's largest general-merchandise retailers, continues to face soft discretionary spending and thinner margins as consumers stay cautious and tariffs similarly weigh on results. As of this writing, both stocks are down more than 40% over the past 12 months.

Image source: Target.

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Yet a close look at both companies, some silver linings in their recent reports, and their management teams' plans to combat these slumps show hope for turnarounds. For instance, Lululemon remains a powerful global brand with expanding reach in markets like China, while Target's digital services and advertising unit continue to gain traction. Ultimately, each company is adapting its strategy rather than standing still.

Lululemon: International strength and product innovation

Lululemon's second quarter of fiscal 2025 (the period ending Aug. 3) showed both pressure and resilience. Revenue grew 7% to about $2.5 billion, with comparable sales up 1%. Regionally, Americas revenue inched up 1%, while international rose 22%.

But earnings per share slipped to $3.10 -- down from $3.15 in the year-ago quarter. Additionally, management lowered full-year guidance and noted the need to strengthen U.S. assortments and accelerate product "newness."

Management's response focuses on levers the company controls. Lululemon is refreshing lifestyle categories that lagged, tightening product life cycles, and carefully managing pricing to absorb tariff changes that raised costs. Meanwhile, international expansion continues at a healthy clip, supported by new stores and rising brand awareness, particularly in China.

After a sharp sell-off, Lululemon's valuation no longer assumes perfection. Shares currently trade at just 11 times earnings. If U.S. trends stabilize while international growth holds, earnings power can rebuild from today's base.

Risks, of course, remain. There are elevated trade costs, and it's always possible that the company's product "newness" will flop. But the brand's premium positioning in the market, loyal customer base, and clear plan to reinvigorate its business support a buy-and-hold case from this reset price.

Target: Meaningful sequential improvement

Target, which boasts nearly 2,000 stores, reported disappointing quarterly results. In fiscal Q2 (the period ended Aug. 2), Target's net sales fell 0.9%, and comparable sales declined 1.9%.

Under the surface, however, several key drivers moved in the right direction. First, management said both traffic and sales trends improved "meaningfully" compared to the first quarter of fiscal 2025. Additionally, digital comps rose 4.3% on more than 25% growth in same-day services like Drive Up and Target Circle 360 delivery. Non-merchandise sales (primarily Roundel advertising, its Target Plus membership, and marketplace revenue) grew 14.2%, adding high-margin dollars.

Looking ahead, management maintained full-year guidance for a low-single-digit sales decline and earnings per share between $8.00 and $10.00. Showing how cheap the stock is, the midpoint of this guidance range gives Target a forward price-to-earnings multiple of just 10.

So, despite some serious challenges for Target, there is a lot to like. Same-day fulfillment deepens loyalty and could help bolster revenue growth. Rapid growth in advertising and subscriptions expands Target's gross margin without inventory risk. And operating margin, at 5.2% in the quarter, still trails pre-2022 levels (it exceeded 8% in 2021). That gap represents an opportunity if Target can turn its business around.

The stock's cheap valuation helps the case. After a large drawdown, the stock's price-to-earnings ratio is only about 10.5 as of this writing, leaving room for multiple expansion if traffic stabilizes and margins recover. It's also worth mentioning that the stock has an impressive 5% dividend yield.

Sure, competition across retail, tariffs, and lingering discretionary softness remain key risks, but these concerns are arguably priced in.

Both Target and Lululemon have stumbled. But each is adjusting -- and both have parts of their business that are doing great. Lululemon's faster product cadence and strong international growth are clear reasons to consider buying the stock. Meanwhile, Target's dirt cheap valuation and double-digit growth in high-margin businesses help offset concerns about a weak consumer and tariff pressures. With valuations reset, both stocks look attractive for investors willing to hold for the long haul.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. and Target. The Motley Fool has a disclosure policy.