Lululemon (NASDAQ:LULU) has been among the hottest names in the apparel and activewear business for the last several years, and many long-term investors have profited handsomely from the stock’s compounding power.
Today, however, LULU shares are under intense macroeconomic pressure and have lost almost 40 percent of their value in the last 12 months. Is Lululemon stock a buy on this severe dip, or does the pullback represent a more lasting adjustment to LULU’s value?
Long-Term Revenue Up 21 Quarters In a Row
One of the most appealing factors about Lululemon as a business has been its longstanding streak of revenue growth. The business has been increasing its revenues for 21 consecutive quarters. In 2020, Lululemon’s full-year revenues totaled about $4.4 billion. Today, its trailing 12-month revenues have risen to about $10.9 billion.
Until fairly recently, Lululemon’s net income was following a very similar trajectory. Total net income rose from $590 million in 2020 to a current trailing 12-month total of nearly $1.8 billion. The last two reported quarters, however, have seen a reversal in net income growth, with Q1 of this year seeing a year-over-year decline of 1.9 percent, followed by a 5.6 percent decline in Q2.
It bears noting, however, that Lululemon is still respectably profitable. Net margin stands at over 16 percent on a trailing 12-month basis, paired with returns on invested capital and equity of 30.8 percent and 42.5 percent, respectively. At 24.5 percent, Lululemon’s return on assets is also about 10 times the sector average.
Lululemon’s Headwinds Are Real
Lululemon, like many direct-to-consumer brands, has been hit hard by the imposition of higher tariffs in the United States and especially by the closing of the de minimis exemption that previously allowed packages with values of less than $800 to enter the country duty-free. As a result, Lululemon has significantly cut its sales expectations for Q3 and expressed doubts about the near-term strength of its business in the US.
Another issue Lululemon is facing is that of increased competition from younger and more trend-driven brands. Serious competitors have appeared in the form of Vuori and Alo Yoga, forcing Lululemon to adjust its product development cycle in order to push new products to market more quickly. This increased competition could be a long-term problem for Lululemon, as the apparel industry is famously difficult to maintain a sustained moat in.
Underlying both of these problems is the fact that consumers, strained by rising inflation and living costs, appear to be spending less on apparel. This is hardly surprising, as the impact of higher tariffs is being felt across the economy. While a recent September inflation report came in lower than the level anticipated by economists, the rate of inflation still rose to 3.0 percent last month. This sustained inflation could pose a problem for Lululemon and other apparel brands, though it’s worth noting that the upcoming holiday gift-giving season could provide a temporary boost.
LULU’s Q2 Results
Lululemon’s struggles were on full display in its Q2 earnings report. While net revenue growth was still respectably positive at 7 percent, growth in the North American market all but collapsed to just 1 percent. Comparable sales also came in at just 1 percent overall, with a 4 percent decrease in North America. In both cases, Lululemon’s strong international sales propped up what were otherwise disappointing results in its core market.
Adjusted guidance for the 2025 fiscal year shows Lululemon’s revenue growth at 4 to 6 percent, excluding the effects of a 53rd week in 2024. Gross profit is expected to fall by $240 million, driven largely by the negative impact of tariffs. Earnings are expected to fall in the range of $12.77 to $12.97 per share, but this is well below the current trailing 12-month EPS of $14.61.
It’s worth noting that Lululemon has been returning some of its cash to shareholders during this difficult period, repurchasing about $278.5 million worth of LULU stock in Q2. Considering Lululemon’s market cap of over $21 billion, however, the effect of management’s buyback efforts on near-term share prices will likely remain modest.
Could LULU Be Undervalued?
Although Lululemon is seeing downward pressure on its earnings at the moment, the stock price may be low enough to somewhat make up for it. LULU trades at just 12.3 times trailing 12-month earnings and 2.0 times sales. Though its P/S ratio is above the sector average, it’s somewhat counterbalanced by the strong rate of revenue growth Lululemon has been able to deliver over a multi-year period. The P/E ratio, by contrast, is significantly below the sector average of 17.7.
LULU is also trading at $179.06, about 8.5 percent below the $194.36 consensus price target assigned by analysts. This implies modest upside, but it seems unlikely that Lululemon will beat the market in the short-term without a major earnings surprise. It also bears mentioning that analysts have turned sharply more pessimistic in the light of recent developments. Six months ago, Lululemon had 16 buy ratings, 12 hold ratings and two sell ratings outstanding. Today, that mix has changed to just three buy ratings, 29 hold ratings and two sell ratings.
Overall, LULU shares are likely trading at a roughly fair value after the sharp fall they’ve taken this year. While Lululemon doesn’t look like a value trap due to its ongoing profitability and strong international sales, the stock may not have a great deal of short-term upside in it while the pressures on its North American business continue.
Is Lululemon Stock a Buy?
Although Lululemon has some very attractive qualities as a business in the form of its years of revenue growth and solid profitability, the business is facing long-term challenges that may negatively impact its value. Specifically, ongoing tariff pressures, a more strained US consumer base and rising competition could all put sustained pressure on both Lululemon’s top and bottom line growth.
Right now, Lululemon looks like it’s probably a better stock to hold than to buy. While supply chain adjustments to mitigate the impact of tariffs and a shortened product cycle could help Lululemon regain some of its momentum, the business is currently operating in a difficult macro environment that may not improve in the immediate future. Coupled with competition from newer brands that appear to be eating away at Lululemon’s moat, this fact may introduce too much uncertainty into LULU for most investors’ comfort.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.