lululemon (LULU) — A Simple Guide to a Complicated Opportunity
Date: 2025-08-17
One-Minute Take
Alpha idea: the market priced lululemon like its best days are behind it in North America, while ignoring how much international growth, men’s, and DTC can still carry earnings. The multiple reset gives us room for upside if results merely prove “not as bad as feared.”
- What happened: After guiding down for FY2025, shares slid hard. Q1 FY2025 revenue grew +7% (constant currency +8%), but Americas comps −2% raised alarms; management trimmed FY2025 EPS to $14.58–$14.78.
- Where we stand: At ~$198/share, the stock trades near a ~13.5× forward P/E using the company’s own EPS guide—uncommon for a brand with LULU’s gross margins and cash generation. That’s the setup. (Price shown above.)
The Business
Lululemon sells premium athletic and lifestyle apparel built around yoga, training, and run—sold through a high-margin, direct-to-consumer model plus a curated store footprint. It ended FY2024 (year to Feb 2, 2025) with 767 stores and $10.6B in revenue, posting ~59% gross margin—elite for apparel.
What the Crowd Sees
- US slowdown & competition: Foot traffic cooled, promotions ticked up, and rivals (Alo, Vuori, On) are loud. Tariffs add sand to the gears.
- Inventory noise: Q1 inventories rose as the brand leaned into product and international expansion—fuel for bears to predict margin cracks.
What We Think Matters More
1) The growth engine moved abroad (and online). International is growing faster than the Americas, and DTC remains the profit anchor. Even in the tough Q1, total revenue still grew +7%, with constant-currency growth higher. That tells you demand isn’t broken—just rotating.
2) Margins are sturdier than the headlines. Gross margin starting in the high-50s gives LULU unusual shock-absorption. If promos and tariffs are time-boxed headwinds, you don’t need heroics—just stabilization—to rebuild EPS. (See FY2024 margin base in the 10-K.)
3) Valuation already did the hard work. At today’s price, the market is paying a mid-teens multiple for a business that still grows, still throws off cash, and still expands internationally. That’s typically when good brands reward patience. (Price/market-cap: see widget.)
A Simple Way to Frame Upside
Think in scenarios, not precision:
- Base Case (our view): FY2025 lands within guidance; FY2026 EPS grows ~+9% as US stabilizes and international keeps compounding. Put a 18× multiple on ~$16 FY2026E EPS → $288 fair value (~+45% from ~$198).
- Bear Case: US stays soft, promos linger. 15× on $14.6 → ~$219.
- Bull Case: Faster demand repair, better mix. 22× on $16.5 → ~$363. (We use company guidance and a simple multiple—no heroic assumptions.)
Rating: BUY. The hurdle is low; proof of “not getting worse” can be enough.
What to Watch
- Americas comps—flat to slightly positive within 1–2 quarters would be a big signal.
- International cadence—store adds + online growth with healthy full-price sell-through.
- Margin tells—discount depth and freight/input inflation vs. tariff drag; any easing goes straight to EPS.
Key Risks
- Prolonged US demand dip → more promos → gross margin compression.
- Tariffs persist or rise → structurally higher COGS until supply chain reroutes.
- Stronger competitors win share in core bottoms → comp recovery stalls.
Why This Can Work for Regular Investors
Great brands rarely travel in straight lines. LULU’s line bent; it didn’t break. When a premium business with proof of global demand, sticky margins, and cash flow gets marked down to a plain-vanilla multiple, you don’t need perfection—you need normal. And normal is often enough.