Lululemon Athletica ($LULU) – Earnings review + thesis update
A good Q4, poor 2025 guidance, the potentially massive impact from tariffs... plenty of factors to weigh off when updating my LULU thesis.
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Lululemon shares got hammered recently after the company reported its Q4 earnings, which looked really good across the board, surpassing consensus estimates and management’s expectations. However, guidance was far less impressive and relatively poor, and investors didn’t let that one slip, with $LULU shares losing 14% of their value in the following trading session.
As a result of this sell-off, which we can safely call it, and the sell-off this last week in response to tariffs, LULU shares are now down 31% so far in 2025, performing way worse than the S&P500 and even underperforming close peer Nike, which is struggling even more to find traction with a cautious consumer.
After this underperformance, LULU shares now trade at their lowest level since October 2024, with a P/E now down to below 20x and a PEG of below 2x, both multiples we haven’t seen often in LULU trading history, as the company has consistently earned a premium due to its high growth, strong brand, and focus on the higher-income customer base.
Yet, there is no denying that lower multiples are justified by now. LULU is simply not growing as fast anymore and is struggling right now, with growth now anticipated to keep slowing down. This has led to concerns over the real strength of the LULU brand and the company’s ability to fight off both larger and smaller peers.
In addition, LULU is facing incredible headwinds from the U.S. tariffs announced by Trump last week, which can significantly impact its U.S. sales and profits. Since this is by far its largest region by revenue, this isn’t a great backdrop.
That raises the question: Is this YTD sell-off a reflection of worsening fundamentals and a worsening outlook, or is the market wrong on this one, and has the sell-off been overdone?
To find out, let’s delve into the Q4 results, discuss tariffs, and update financial projections!
Let’s delve in!
Q4 and FY24 results + Highlights
Q4 revenue was $3.6 billion, up 8% YoY (excluding the 53rd week)
FY24 revenue was $10.6 billion, up 8% YoY.
Interestingly (considering the 14% sell-off), LULU actually delivered a really decent quarter, with steady top-line growth and expanding margins. On a comparable basis, top-line growth in Q4 was mostly in line with recent quarters, at 8% YoY, showing a real stabilization in growth in the high single digits.
Yes, this is no longer the double digits we had gotten used to from LULU, but considering the underlying conditions, I don’t think this is all too bad. What I mean by this is that the macro environment is not working in its favor, contributing to a more cautious consumer.
For reference, based on an Ipsos survey, consumers are straight up spending less due to increased concerns about inflation and the economy, and one of the sectors best reflecting this is apparel. This translates into slower traffic, particularly in the U.S., something that will continue in 2025, especially with fears over an economic growth slowdown and a potential recession growing larger.
It is not just LULU but also its peers that are feeling this impact. While LULU previously was able to offset such headwinds driven by its rapidly growing brand, at its current size, this is no longer reasonable, and it is showing. For these same reasons, a return to previous growth rates seems out of the question in the years ahead.
Investors will need to get used to it and face reality: LULU is no longer the high-growth stock it was for most of the last decade.
Looking at Q4, LULU reported comparable sales growth of 4% YoY, boosted by solid store growth and 14% growth in square footage. By category, men’s increased by 12% YoY, and women’s grew by 6% YoY.
Looking at the regional performance, growth in the U.S., the company’s largest region by a mile, stabilized but remained flattish at 1% with a worsening macro backdrop. Positively, international growth remained considerable, as LULU is heavily investing in international growth and is seeing solid traction. This is reflected through 38% growth in Mainland China and 22% growth in the Rest of the World, driven by 17% comparable sales growth, which shows growth here isn’t just driven by rapid store expansion but mostly by rapid sales growth.
Moving to the bottom line, LULU impressed in Q4, with expanding margins.
FY24 operating margin was 23.7%, up 50 bps YoY
FY24 EPS grew 15% YoY
Q4 gross profit margin was 60.4%, up 100 bps YoY
Q4 operating margin was 28.9%, up 40 bps YoY
Q4 EPS was up 16% YoY
As I said earlier, LULU delivered excellent margins, even as management still grew square footage by 14% and invested heavily in brand awareness.
For starters, a gross profit of 60.4% was a new all-time high and beat expectations by 100 bps. This was driven by a 160 bps YoY improvement in the product margin thanks to lower costs, lower markdowns, and improved shrink. This was offset by higher air freight and the negative impact from FX.
Nevertheless, this was a remarkably strong performance, showing that even as the company faces macro headwinds, it is still able to expand margins, which show a solid uptrend.
Further down the line, SG&A costs grew strongly, growing to 31.5% of revenue, up 60 bps from last year, driven by strategic investments. Still, thanks to gross margin gains, the operating margin expanded by 40 bps YoY to 28.9%, another new high.
Ultimately, this led to a net income margin of 20.8%, down 10 bps from last year, but still allowing EPS to grow by 16% YoY.
These margin improvements and solid cash flows allowed LULU to maintain a healthy balance sheet and return cash to shareholders through repurchases. Last quarter, LULU bought back $332 million worth of its own shares, bringing the YTD total to $1.6 billion.
Meanwhile, the balance sheet remained healthy, with LULU holding $2 billion in cash and a manageable $1.6 billion in debt, leaving the company in a healthy net cash position.
Management has steered the business back on track
A big issue for LULU in 2024 was a lack of innovation and newness in its products, while at the same time, it misjudged successful products, leading to unavailability. The combination significantly impacted its in-store conversion rate, meaning that while traffic was healthy, sales lacked, which was the initial reason for the slowdown in growth earlier this year.
In other words, the company was straight up unable to sell its products to the customers in its stores due to a lack of new and exciting products and too little inventory of those products in high demand.
Positively, management acknowledged this in time and has steered the business back on track in the second half of the year, with product newness in Q1 back in line with historical levels. Management is seeing the result, with this improvement offsetting worsening macro conditions. This improved newness should allow LULU to improve guest acquisition and purchase frequency.
In 2025 so far, LULU has already launched a number of new products and new product lines, which have seen solid initial adoption. In fact, the company’s Daydrift product line, which consists of lifestyle trousers for women, is completely sold out everywhere after a really good initial reaction, driven by the unique and extremely comfortable fabric with a classy look.
I believe this goes to show LULU’s differentiation. You see, while the business might be struggling due to external factors and has struggled over the past year due to management’s mishaps, LULU remains a real apparel leader with a differentiated strategy through its focus on high-end women’s apparel and superior fabrics, which are really loved among its customers, leading to great customer satisfaction and loyalty.
Yes, I know that brand loyalty isn’t what it was before in general, but I believe the Lululemon brand is underestimated by many, not relying as much on being an iconic brand but more so through superior products that you can’t find everywhere else. This is precisely why the Lululemon brand, despite its relatively small size, has a solid place in the top 100 of Kantar’s most valuable brands list.
I believe this is still an underestimated factor.
Meanwhile, LULU has some more terrific growth levers to pull. The biggest one probably is growing its brand awareness, which remains remarkably low, especially outside of North America. For reference, unaided brand awareness in France, Germany, and Japan still sits in the single digits, while in China, it is also still low in the mid-to-high teens. Even in the U.S., it remains low in the low 30s.
In simple terms, this means a significant portion of consumers won’t recognize the Lululemon brand and don’t think of it when looking for apparel. This leaves the company with a massive opportunity to introduce these consumers to its brand and products.
Therefore, the company is investing heavily in brand promotion, mainly through events, sports ambassadors, and campaigns. For reference, the company recently signed PGA golfer Max Homa, professional tennis player Frances Tiafoe, and Formula One champion Lewis Hamilton to its ambassador team to grow brand visibility and positive association.
I really like these efforts by management and anticipate them to help brand visibility and association. While not an immediate needle mover, this could pay off over time.
Most importantly, it shows me management is focusing on the right areas.
Tariffs are a big concern
Yet, while I am quite positive about LULU fundamentally and on its general prospects, the U.S. tariffs announced by Trump last week are a big concern, explaining why LULU was one of the most significant large-cap bleeders last Thursday, losing some 11%.
You see, back between 2016 and 2019, LULU moved a big portion of its production away from China and towards Southeast Asia, particularly to Vietnam, in an effort to lower dependence on China amid worsening trade relationships with the U.S. As a result, the company today has over half of its production located in Southeast Asia, comprised of roughly 33% in Vietnam, 11% in Sri Lanka, 9% in Cambodia, and 6% in Indonesia.
Yet many of these countries are hit the hardest by tariffs, with Vietnam now facing a staggering 46% tariff on all goods imported into the U.S., while the others face tariffs of between 10% and 20%.
The combination of LULU deriving by far most of its revenue from the U.S. and it producing over half of its products in Southeast Asia, the company is in a really bad position.
Simply put, the company will have to either negotiate down production prices with its Vietnam manufacturers (for which there is little room), absorb these import tariffs (hurting its own margins), or push these costs onto the consumer, raising its prices (which will put pressure on sales).
Now, the sweet spot and likely scenario are probably pulling all these levers and splitting the pain across the board. Nevertheless, the end result is that LULU will be hit hard, and while management has already incorporated some tariff effects into its outlook, I don’t believe it has so to this extent.
If tariffs remain in place, which we have to assume right now, we should count on top-line growth slowing down further due to the combination of a cautious consumer and higher prices, and LULU having to absorb some of these higher costs, putting pressure on profits.
This is a big thing that must be included in forward-looking estimates. Also, heightened uncertainty will put pressure on its valuation multiples.
In other words, this potentially creates a very bad headwind for LULU.
On a slight positive note, yesterday, Trump posted that he had a productive call with Vietnam government leaders regarding the tariffs, suggesting a deal is possible. If a deal is made and the tariffs are canceled, this would be incredibly positive news.
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Outlook & Valuation
FY25 revenue is to be in the range of $11.15 billion to $11.3 billion, representing YoY growth of 7-8%. This includes the expectation for mild growth in the U.S. and one percentage point of negative impact from FX.
Gross margin to decline roughly 60 bps in 2025, driven by deleverage on fixed costs, FX headwinds, and the impact of increased tariffs related to China and Mexico.
Driven by ongoing investments, management expects some more SG&A deleverage of about 40-50 bps, likely driving the operating margins lower by about 100 bps YoY. This also includes the impact of foreign exchange and tariffs.
EPS is expected to be in the range of $14.95 to $15.15 in 2025, reflecting growth of only 3% YoY (including an FX headwind of about $0.30 to $0.35)
To be honest, while the outlook did fall short of expectations, including my own estimates, and by quite a bit, it is not as bad as it looks overall. This guidance issued by management includes a fair share of headwinds stemming from a weakening consumer, FX headwinds, and upcoming tariffs (up to a degree), significantly hurting both the top and bottom-line performance.
With fears over an economic slowdown and potential recession only growing, I expect consumer spending to come under greater pressure throughout the year, especially amid significant tariffs imposed, which won’t benefit LULU, especially with its considerable North American exposure.
Management acknowledges this and expects considerable uncertainty driven by macro and geopolitical circumstances to persist, which is accounted for in its outlook, as is the impact of announced tariffs for China and Mexico (not Vietnam). Again, this is up to a degree, and I expect management to issue revised guidance with its Q1 results to incorporate upcoming tariffs, if put in place by the Trump administration.
Meanwhile, management is focusing on what it can control, and as far as that goes, it is doing really well! Management has brought newness back to historical levels and remains committed to its expansion efforts, aiming for another 10% YoY growth in square footage in 2025, including entry into several new markets like Italy, Denmark, Belgium, Turkey, and the Czech Republic.
Furthermore, the company is still on track to meet its 2026 growth targets set in 2021. Over the last three years, the company has grown revenues at a 19% CAGR, expended its operating margin by 170 bps, and grew EPS at a 23% CAGR, all of which are ahead of target, and one should also consider that these targets don’t account for macro weakness outside of management’s control, making this performance even more outstanding.
Is the company going to hit its 2026 targets? I honestly doubt it, assuming the operating environment doesn’t improve in 2025, yet I expect it to come quite close.
As for 2025, driven by conditions outside of its control, management’s guidance fell well short of my projection for revenue of $11.51 and an EPS of $15.55. As a result, a reset of near-term expectations is required.
Taking into account management’s guidance and commentary, the heightened odds of a recession after last week, and the big potential impact of tariffs on LULU’s business, I have turned considerably more cautious with my FY25 and FY26 guidance. I now assume a significant impact from tariffs in 2025 and 2026 and for the world economy to slow down.
I now anticipate a recovery in 2027 and growth to accelerate in 2028 and beyond, and the underlying situation for LULU will improve. I remain confident in the strength of this brand and its ability to keep gaining market share in the long run.
Note that this guidance is far lower than the current Wall Street consensus, with Wall Street yet to update estimates after the tariff announcements.
Based on the estimates above, which are below the current Wall Street consensus, LULU shares still trade at just 17.5x this year’s earnings, which is anything but expensive for a company with an outlook, brand, and growth runway like this. This translates into a PEG of just 1.7x, which is a 28% discount to its 5-year average and only a 20% premium to the (much slower-growing) sector median.
At current prices of around $254 per share, it seems like Wall Street is valuing LULU like its fundamentals are worsening, which is a view I don’t share. Discounting this business this heavily based on the impact of mostly external factors that impact the entire industry seems too much to me.
Don’t get me wrong; I agree that LULU doesn’t deserve its prior multiples, especially amid a very clouded near-term outlook. Considering the current uncertainty around the state of the economy, the impact of tariffs, as well as the fact that LULU has to show it can reaccelerate growth and that its brand is still strong, I believe a higher earnings multiple than 20 or a PEG of over 1.8x, even when based on a solid outlook, is not warranted right now.
I am just not willing to pay its premium multiple at this time.
Based on this conservative multiple, LULU shares don’t look as attractive, even after the massive decline in share price. If we assume a 20x long-term multiple based on a base case scenario and my FY27 EPS estimate, I calculate a target price of $350 per share. This reflects potential returns of roughly 10% annually from current levels of around $265, which I don’t think reflects a sufficient risk-reward profile amid current uncertainty.
Therefore, at these levels, I don’t deem LULU shares great value, mostly due to the potential impact of tariffs.Do note that if tariffs aren’t put in place in full force on April 5, LULU has quite a bit of upside. Yet, I see no room for positive assumptions right now.
If shares drop further to below $250, I believe the risk-reward ratio will once again be compelling enough to make me want to buy some shares.
For now, I am on the sidelines. I rate LULU shares a hold for now.
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