Lululemon’s Stock: A Lemon in the Market’s Orchard

by

Lululemon Athletica (LULU) shares plunged following its fiscal Q2 earnings report, as a bad year just got worse for the stock. Its shares have now been more than cut in half in 2025.

Let’s take a closer look at its results and prospects to see if the stock can come back in fashion-or if it’s merely a case of the market’s alchemists failing to turn lead into gold.

Loading widget...

Looking to regain momentum

While its fiscal Q2 results were largely in line with analyst expectations, Lululemon’s management owned up to its mistakes. It noted that the landscape for athleisure apparel has become more competitive, and that its product lines have gotten stale. One might say the company’s design team has been stuck in a time loop of “yesterday’s trends.”

The company said that when it’s gotten its products right, they have done well. However, it needs to move more quickly. On this front, the company is looking to work with vendors to fast-track certain designs and reduce lead times. It added that in areas it has innovated, like performance apparel, it has been gaining market share. However, the changes being made will likely have more of an impact next year. A bit like a wizard casting spells in a language they only half remember.

The quarter itself for Lululemon wasn’t terrible. Overall revenue climbed by 7% year over year to $2.53 billion, while its adjusted earnings per share (EPS) fell by less than 2% to $3.10. Analysts were looking for EPS of $2.88 on sales of $2.54 billion. A minor disappointment, but not the end of the world-unless you’re a shareholder who’s been waiting for a miracle.

While the company is struggling with its North American operations, it’s doing well internationally. Americas’ revenue edged up 1% to $1.8 billion, while same-store sales fell 4%. However, international revenue climbed 22%, with comparable-store sales surging 15%. A tale of two continents, one with a frosty wind and the other with a warm breeze.

China led the way, with revenue roaring 25% higher to $392.9 million, with same-store sales up 17%. Rest-of-world sales jumped 19% to $374.1 million, as comparable-store sales climbed 12%. A triumph for the East, where the market’s alchemists are clearly working overtime.

Lululemon’s men’s category saw revenue rise by 6%, while women’s sales increased by 5%. Accessories sales were strong, climbing 15%. A reminder that even in a world of chaos, some things remain constant-like the enduring appeal of a well-made bag.

Gross margin fell 110 basis points to 58.5%, while inventory levels increased 21% to $1.7 billion. These are two metrics to watch for struggling retailers and brands, as they can lead to more pain in the future. A warning bell for the unprepared, much like a dragon’s roar in a quiet village.

Lululemon’s gross margins are holding up pretty well, meaning it’s still doing a lot of full-price selling, but the inventory is something to keep an eye on. Tariffs cloud the picture a bit, as some companies wanted to stock up ahead of increases. Tariffs will also cut into its gross margins in the future. A bureaucratic storm that no amount of magic can calm.

Looking ahead, Lululemon lowered its guidance. It now sees sales coming in $10.85 billion to $11 billion, representing growth of 2% to 4%, and adjusted EPS in a range of $12.77 to $12.87. That was a big change from its earlier guidance for EPS of $14.58 to $14.78 on revenue of $11.15 billion to $11.3 billion. Tariffs and the removal of the de minimis exemption are expected to now take a big bite out of its gross margins and thus, earnings. A case of the market’s fickle nature, as capricious as a storm in a teacup.

For fiscal Q3, Lululemon is looking for sales of between $2.47 billion and $2.5 billion, good for growth of 3% to 4%, and adjusted EPS of between $2.18 and $2.23. A modest hope, but perhaps enough to keep the lights on in the company’s tower of ambition.

Should investors buy the dip?

The first way for a company to improve is to figure out where it’s making mistakes and work to fix them. Lululemon’s problems have been going on for a while now, but it finally looks ready to take some real action to fix them. It’s going to need to both innovate and act quicker to get trends right. A bit like a bard learning new ballads in a world that’s forgotten the old ones.

I don’t think the brand is broken, as it is still getting strong margins, which is a sign it’s not overly discounting. However, it can no longer just rely on its brand’s reputation. On the positive side, the company is seeing strong momentum internationally. While China has been a drag on many higher-end brands, the country has actually been a big growth driver for Lululemon. A paradox as bewildering as a clockwork octopus with a penchant for philosophy.

From a valuation standpoint, Lululemon now trades at a forward price-to-earnings (P/E) ratio of around 11 times next year’s analyst estimates. That compares to about a 30 times forward P/E for the struggling Nike (NKE). A valuation that’s as low as a dwarf’s sigh in a cathedral of gold, but still a gamble for the faint of heart.

While there is a risk that things get worse, I think between the plan it has in place and the current valuation, it’s worth taking a shot on the stock. A leap of faith, perhaps, but the market is full of such leaps-many of them ending in spectacular failures, but a few in triumphs that make the stars themselves jealous.

And so, dear reader, we conclude with a wry smile and a shrug, as the market’s alchemists continue their endless dance of hope and despair. 🍋

Read More

2025-09-08 10:45