Lululemon – Cheap for a Reason
Recent optimism lacks foundation - Headline numbers don't tell the entire story
The Lululemon investment thesis has been crumbling for most of the last year.
The Canadian apparel company, once the undisputed leader in premium activewear and seen as one of the most promising prospects in the industry, has found itself under mounting pressure from both external headwinds and internal failures.
Back in September, I concluded that Lululemon’s fundamental investment case was breaking down, and not merely because of external headwinds, such as tariff pressures and a cautious U.S. consumer weighing on its performance, but due to growing competition, deepening execution issues, fading consumer demand in its core U.S. market, and a product pipeline that is failing to generate excitement and growth, leading to evaporating relevancy and consumer interest in the brand.
The company simply isn’t able to differentiate itself from the competition any longer due to a stale assortment and strategic missteps, which lead to falling consumer interest – it is no longer behaving like a category-defining growth company.
The result is a bleak outlook, especially given the structural characteristics of the activewear and apparel industry itself. Unlike asset-heavy or highly regulated industries, premium apparel offers little durable protection once brand heat fades. Barriers to entry are low, switching costs for consumers are minimal, and trends move quickly, meaning today’s category leader can rapidly lose relevance if it fails to consistently innovate and differentiate. In such an environment, even a modest slowdown in product innovation or brand momentum can quickly translate into lost market share, margin pressure, and sustained revenue deceleration.
This puts LULU in a bad spot.
And yet, developments in recent weeks have offered reason for some cautious optimism. For starters, it reported Q3 earnings a few weeks ago that could count on some investor appreciation: it beat expectations, raised guidance, and showed mild demand improvements, though it is clearly still struggling, and the results were far from good.
More importantly, some larger internal changes are on the horizon, giving investors hope for a turnaround. The company announced a major leadership change, with 7-year CEO McDonald leaving by the end of January 2026, activist investor Elliott taking a sizeable stake, and Lululemon announcing a renewed commitment to international expansion to reduce dependence on the U.S. consumer and fuel growth.
Safe to say this has rekindled some cautious investor enthusiasm toward LULU shares, which have recovered about 30% since an early November bottom, although they still remain down 45% YTD and trading 60% below their December 2023 all-time high. This means shares still trade at reasonable multiples. But is this “discount” still justified, or is there indeed reason for optimism?
While I turned very bearish on LULU shares back in early September, recent developments have given me enough reason to revisit the business and assess its performance and underlying developments to update my financial forecast and opinion on it.
So, without further ado, let’s delve in!
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Headline numbers are misleading
On December 11, LULU released its Q3 financial results. Let’s jump straight into the numbers.
LULU reported total Q3 revenue of $2.56 billion, surpassing the consensus by $80 million and reflecting YoY growth of 7%, which is roughly in line with the prior two quarters.
When we look at FX-neutral growth (excluding the effects of currency swings), it shows slightly more promising signs, with growth ticking up from 6% in Q2 to 7% in Q3. Yes, this is still down from 8% in Q1, but I am pleased to see LULU not losing any more momentum and seems to be stabilizing, though I do think it is too early to celebrate.
An even better indicator of business momentum is comparable sales, which strips out the effects of store openings and global footprint expansion, providing a clearer view of organic growth. Here, the picture remains dim, but is improving. Comparable sales in Q3 were up 2% YoY, up from 1% in Q1 and Q2.
Despite a very mild improvement from prior quarters, this number continues to reflect significant weakness in the underlying business, as LULU struggles to draw consumer interest, with traffic down YoY, offset by mild price hikes.
Moreover, like I just pointed out, while numbers show some improvement from prior quarters, it is too early for real optimism. Critically, the quarter included better-than-expected Thanksgiving weekend sales performance, but this momentum slowed materially in the weeks after, with traffic pulling back again, which isn’t a good sign for quarters to come, but this did lift momentum in Q3.
On top of that, Q3 this year benefited from two calendar shifts compared to last year (the start of 11/11 events and a later Chinese New Year), which added to YoY growth and will subsequently be a drag on Q4 growth. While management doesn’t disclose the exact tailwind from these calendar shifts and the better-than-expected Thanksgiving performance, which likely led to some pulled-forward demand, I believe it is safe to assume that comparable momentum was stable at best compared to prior quarters, and may even have weakened slightly further.
So, these numbers isolated don’t tell the full story, and I am still seeing little signs of improving demand.
This weakness remains most pronounced in the U.S., its largest end market by some distance. Americas revenue was down 2% in Q3, driven by a comparable sales decline of 5%, weakening further from -3% in Q2, despite the Thanksgiving boost.
This lackluster growth reflects two factors: weakness in apparel demand due to shifting consumer preferences and cautious spending, and management’s mishaps, which have led to a lack of consumer interest in its products.
First of all, LULU is facing broader industry headwinds from both cautious consumer spending and a shift in consumer preferences away from apparel and back to fashion categories. Whereas non-athletic categories are showing strength in recent quarters, apparel isn’t showing this upward momentum, which isn’t helping LULU re-accelerate growth in North America.
Yet, more importantly, management has been dropping the ball on product innovation and development, as I laid out more broadly in my September coverage of the shares. And in the apparel industry, where consumer attention is fleeting and competition is relentless, failing to spark demand and maintain consumer interest in your brand is fatal.
During the earnings call, management stated that guest metrics remain consistent, with growth in both total and retained guests. Yet traffic numbers tell a story, mainly due to a falling visit frequency. LULU might be able to retain and acquire guests, but a lack of product newness and innovation isn’t making them come back frequently.
This dynamic tells me that too many LULU customers are there for a single product or a few visits per year, showing little deeper commitment to the brand, which is a long-term reason for concern.
In a category where brand loyalty is built through repeat engagement and a steady stream of compelling new product drops, declining visit frequency is a clear signal that Lululemon is no longer top of mind for a growing portion of its customer base. Rather than browsing, discovering, and replenishing across categories, consumers appear to be shopping with a specific, narrow intent, often tied to legacy hero products, and then disengaging.
Weak product innovation leads to fewer visits, fewer visits reduce exposure to new product, and lower exposure further dampens demand, a cycle that is difficult to reverse without a meaningful reset in product strategy and brand positioning. For a premium apparel brand operating in a highly competitive, low-switching-cost market, that is a dangerous place to be.
Take up-and-coming Canadian peer Aritzia, which has been building a strong presence and brand in the apparel sector. Whereas LULU has been grappling for growth, Aritzia has seen revenue grow 32% in the latest quarter, differentiating itself with a competitive product at a more affordable entry point. These emerging competitors are slowly eroding LULU’s moat amid its recent struggles to compete effectively.
At this point, it just can’t compete with competitors that execute better, and it is losing its grip on the market, which is a slippery slope.
In my view, management’s inability to turn this around over the last year or two is a massive red flag, which has reduced my confidence in its forward growth. Until there is clear evidence of improved product execution and a sustained recovery in consumer engagement, it is difficult to argue that Lululemon has regained control of its core growth engine.
For now, it hasn’t.
Now, management does have a plan in place that has some promise, but it takes time to execute, and management has already lost my confidence over the last year or so, identifying issues multiple times, but showing no fundamental changes.
However, management is now confident an inflection will be seen in spring 2026, when product newness and innovation should be back on track. Mostly, management aims to revitalize growth by improving product differentiation, elevating the in-store experience, refining marketing, and bringing more newness to its products.
It will increase the frequency and breadth of new styles, bringing new style penetration to 35% next spring, which is the share of total assortment or sales that comes from newly introduced product styles, up meaningfully from recent years, when LULU relied too much on legacy products.
Additionally, LULU wants to increase speed to market to better keep up with current trends and not fall behind the competition again. It will improve its product development process, reducing development time from 18-24 months to 12-14 months, which is a good move.
On top of this, LULU has launched a website redesign and enhanced its merchandising to regain consumer interest and brand awareness.
Ultimately, I think there is promise in these efforts by management, and they are critical moves to become more competitive, but I doubt they will make enough of a difference at this point. It is practically relying entirely on an improved product offering to revitalize growth, but it will remain a premium option with much higher pricing than the competition and seemingly little brand loyalty to demand it.
Therefore, I am unsure how much these efforts by management will move the needle or whether more fundamental strategic positioning changes will be necessary to regain competitiveness amid growing competition.
Anyway, until management can regain confidence by showing signs of better execution and a turnaround, I see little reason to jump on the bandwagon.
On a more positive note, LULU’s momentum outside the Americas looks much better, though outperformance there was driven by the earlier-mentioned calendar shifts in China. As a result, China’s revenue was up 47% YoY, driven by comparable sales growth of 25%, a solid improvement from 25% and 16% in Q2. This was driven by a good response to the merchandise assortment and favorable calendar shifts, which will put pressure on Q4.
The rest of the world’s growth was also healthy at 19% YoY, driven by comparable sales growth of 9% YoY, in line with Q2. Together, this leads to international revenue growing 33% YoY.
International remains an important growth driver for LULU and a great opportunity for the decade ahead. The company has steadily expanded its global reach over the last seven years, adding 12 countries and making China its second-largest market.
However, LULU’s international push has always been somewhat of a second priority behind the North American market share gains, which has led to serious overdependence on the U.S. consumer. Positively, this seems to be changing. The company released a statement earlier this month, stating that it will push harder on its international expansion efforts, aiming to enter 6 new markets in 2026 alone, a feat that previously took 3-4 years.
I think this is great! The company’s international opportunities are massive, and reducing dependence on a single economy and on the U.S. consumer is a good move in my book. It aims to launch in Greece, Austria, Poland, Hungary, and Romania next year, in partnership with Arion Retail Group, in addition to its previously announced entry into India through a partnership with Tata CLiQ.
This could turn into a positive catalyst and growth driver, offsetting some of this weakness in the U.S.
Finally, it is worth noting that LULU continues to expand its store square footage globally, which drives the 5-percentage-point difference between comparable sales and revenue growth. The company ended the quarter with 796 stores, growing square footage by 12% YoY, adding 47 new stores. The majority of stores were opened in the U.S. and China.
With that, let’s move to the bottom line!
While LULU’s bottom line has been holding up relatively well over recent quarters, despite slowing growth and cost headwinds, weakness is now finally emerging, driven by higher input costs, continued investments, and slowing top-line growth.
LULU reported a Q3 gross profit of $1.43 billion, reflecting a gross margin of 55.6%, down 290 bps YoY. This reflects a 290 bps YoY drop in the product margin, driven by the impact of tariffs and higher markdowns, with the latter up 90 bps YoY. However, this was still quite a bit better than the 410 bps decline management had guided for, thanks to higher-than-expected revenue.
Yet, the impact of tariffs is undeniable. Management is working to offset this through “strategic pricing actions, supply chain initiatives, including vendor negotiations and DC network efficiency and enterprise-wide savings initiatives,” but it isn’t able to offset the higher prices entirely without raising prices, for which there is no opportunity without further pressuring traffic, so lower margins are inevitable, hence the lowest gross margin in almost three years.
Moving further down the line, SG&A expenses sat at 38.5% of revenue, up 50 bps YoY, as management continues to opportunistically invest in the business. Positively, this was also better than the guided 150 bps of deleverage.
This resulted in an operating income of $436 million at a 17% operating margin, down 350 bps YoY, reflecting the SG&A deleverage and lower gross margin. This also meant the net income margin fell to 12%, down 270 bps YoY, seeing some benefit from buybacks.
Ultimately, this translated into an EPS of $2.59, beating consensus estimates by a sizeable $0.38 but also down 10% YoY due to lower margins.
Positively, management has a healthy balance sheet to take some pain. LULU ended the quarter with just over $1 billion in cash and practically no debt. This also allowed management to keep buying back shares and approve a new $1 billion repurchase program, leaving it with $1.6 billion in capacity, enough to retire 6.5% of outstanding shares.
Finally, inventory was up 11% in Q3 to $2 billion, but up just 4% on a unit basis, reflecting higher tariff rates and foreign exchange. However, this unit increase was well below management’s low-double-digits guidance, thanks to a strong Thanksgiving weekend that allowed LULU to clear some seasonal and end-of-life product, positioning it well for spring 2026.
All in all, I think the quarter’s results give little fundamental reason to turn more optimistic than before.
CEO change & Activist activity
What gives more reason for optimism are recent announcements regarding management and a new shareholder.
For starters, CEO Calvin McDonald announced that he will step down from his role by the end of January 2026, marking the end of a seven-year tenure. In his statement, McDonald framed the decision as a natural transition aligned with the conclusion of Lululemon’s five-year strategic plan, noting that both he and the board agreed “the timing is right for a change.” While this was presented as an orderly and well-considered succession, the market reaction suggests investors had been hoping for exactly this outcome.
Indeed, several analysts welcomed the news, arguing that leadership change was increasingly necessary to revive a stagnating American business. As BTIG’s Janine Stichter put it, investors were looking for “quicker and bigger changes” to address weakening growth and execution issues in the U.S. Similarly, Stifel’s Jim Duffy Konik emphasized that Lululemon must “return to its roots,” arguing that the brand has been diluted by inconsistent design decisions and expansion into non-core categories, concerns that closely mirror the issues I have highlighted throughout this report.
In the interim, the company has appointed Marti Morfitt as Executive Chair, while Meghan Frank and Andre Maestrini will serve as interim co-CEOs, overseeing all aspects of the business until a permanent CEO is appointed. While this temporary structure provides continuity, it also underscores that meaningful strategic change is unlikely to occur overnight, reinforcing the idea that this remains a multi-quarter, if not multi-year, turnaround effort.
Perhaps more importantly, leadership change is now accompanied by growing shareholder pressure. Activist investor Elliott Investment Management recently disclosed a stake exceeding $1 billion in Lululemon, instantly making it one of the company’s largest shareholders. According to reporting by The Wall Street Journal, Elliott is actively engaging with the company and has already begun lining up potential CEO candidates, signaling a far more hands-on approach to driving change.
Elliott’s involvement materially alters the governance backdrop. The firm has a long track record of pushing for operational discipline, sharper strategic focus, and leadership accountability, particularly when brand strength has eroded due to execution missteps. Its presence significantly increases the likelihood that Lululemon will be forced to confront its product and positioning issues more aggressively than it has over the past few years.
Taken together, the CEO transition and Elliott’s activist stake represent a clear acknowledgment that the status quo is no longer acceptable. While this does not guarantee a successful turnaround, it meaningfully improves the odds that Lululemon will pursue more decisive action, particularly around product strategy, brand positioning, and leadership, than it has shown so far.
That said, leadership change alone is not a panacea. Until these governance shifts translate into tangible improvements in product innovation, consumer engagement, and U.S. demand trends, optimism should remain measured.
Still, this combination of internal change and external pressure marks the most credible catalyst for a reset in Lululemon’s strategy that the company has seen in years.
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Outlook & Valuation
Jumping into the outlook, let’s start with management’s commentary and guidance.
Management noted a few important factors to consider in its outlook. As alluded to before, LULU saw its momentum slow materially after a strong Thanksgiving weekend due to pulled-forward demand, and it will face a negative impact from the calendar shift in China, both of which will drag on performance in Q4.
As a result, management now guides for FY25 revenue in the range of $10.96 billion to $11.05 billion, reflecting YoY growth of 5-6%, excluding the 53rd week. This is ahead of a $10.96 billion consensus. This includes the assumption of negative 1-2% growth in the U.S. and China above or at the high end of the previously-guided 20-25% growth range, despite some momentum lost in Q4.
On the bottom line, management expects its gross margin to fall 270 bps YoY in 2025, slightly up from a prior guidance for a 300 bps drop, driven by a lower tariff impact. Meanwhile, SG&A deleverage is expected to be roughly 120 bps, up from prior guidance of 80-90 bps, driven by optimistic investment expectations, mainly in marketing. This will likely lead to a 390 bps lower operating margin YoY, including a 680 bps decline in Q4, as cost pressures are mounting.
Ultimately, this leads to EPS guidance of $12.92 to $13.02, up $0.10 from prior guidance at the midpoint, driven by margin upside and stronger growth. Also, this was comfortably ahead of a $12.86 consensus.
Looking ahead to 2026, investors should surely temper their expectations, with momentum going into the year likely quite poor and 2026 marking the first full year of increased tariffs and the removal of the de minimis provision. Add to that management’s optimistic investments in the business, and the expectation is that negatives will likely outweigh positives on the bottom line, pointing to further margin weakness and negative profit growth.
Long-term, of course, management believes that current investments will lead to an improved outlook, aiming to accelerate growth in the U.S., maintain momentum internationally, and protect the operating margin, with long-term improvement.
With that in mind, let me get to my own forecasts. And honestly, I see no reason to become more optimistic than I was in September. In fact, I have further trimmed my forecast through 2028, especially for profits.
For 2025, I now project growth of just under 4% to $10.97 billion, reflecting a loss in momentum in Q4. This is slightly higher than my prior estimate. On the bottom line, however, I have trimmed my expectations a bit to account for the expected outsized margin weakness in Q4.
Looking further ahead, my revenue forecast is roughly unchanged from September. I still expect growth to stabilize in 2026 and gradually accelerate through 2028, assuming some success in revitalizing U.S. growth and continued momentum internationally, especially amid its renewed expansion efforts. On the bottom line, weakness will likely persist in 2026, with margins declining further, putting some pressure on EPS. However, I expect some margin recovery in 2027 and 2028, thanks to easier comparable quarters, improved top-line momentum, and easing investments. This will likely lead to better EPS growth, though I have trimmed my expectations to account for tariffs and higher marketing spend.
These assumptions are reflected in the projections below!
That brings us to valuation, and LULU shares don’t look too bad, though lower multiples are very much justified. At a current share price of $211, shares trade at:
16x this year’s earnings and 17x next year’s earnings.
A PEG of 2x
Now, this is a level that, on the surface, looks meaningfully more reasonable than where Lululemon has historically traded. For most of the last decade, investors were willing to pay a premium multiple for LULU because it was viewed as a rare “high-quality growth” compounder in retail: strong brand equity, consistent double-digit growth, pricing power, and best-in-class margins. In that context, a mid-to-high 20s earnings multiple often looked justified.
Today, the market is sending a very different message. At ~16x forward earnings, LULU is no longer being priced like a category-defining growth company. It is being priced more like a mature apparel brand facing structural uncertainty, which, given everything discussed above, is a fair characterization.
The key point is that the multiple compression is not “just” an overreaction or a macro-driven derating. It reflects a genuine deterioration in the quality of the business’s growth profile and predictability: Growth durability has weakened. The Americas business is shrinking, traffic is down, visit frequency is falling, and the brand appears to be losing mindshare in its most important market. Even if international remains strong, it is increasingly being asked to compensate for structural weakness at home.
Margins are under pressure with limited near-term relief. Tariffs, higher markdowns, and elevated marketing spend are all pushing profitability lower. And with traffic already weak, management has less pricing power than it did during its peak brand momentum years.
The moat looks thinner than the market had assumed. This is the crucial issue. Premium apparel is not software. It doesn’t benefit from high switching costs or durable network effects. If the brand loses heat and product newness falters, consumers migrate quickly, and competitors are increasingly able to match LULU’s aesthetic and quality at lower price points.
This is why the PEG still sits around ~2x despite the lower earnings multiple: the “E” might be cheap, but the “G” is no longer reliable. A lower multiple alone does not make a stock attractive if the earnings power is at risk of further erosion or if the path back to durable growth is uncertain.
To be clear, there is a scenario where today’s valuation becomes compelling. If management (and/or Elliott) succeeds in forcing a real product reset, reigniting U.S. demand, and stabilizing margins by 2027, then a mid-teens multiple would likely prove too pessimistic, and the stock could re-rate meaningfully. But that is an execution-heavy bull case that requires multiple things to go right: stronger product innovation, improved merchandising, a sustained recovery in visit frequency, and a reduction in markdown pressure, all while the competitive landscape remains intense and the macro remains uncertain.
In my view, this is exactly why the market is not willing to pay up for LULU today, even after a 60% drawdown from the highs. Yes, shares look attractively priced compared to historic averages, and the valuation may tempt long-term investors who remember what this business used to be. But the lower multiples are more than justified given the uncertainty around its outlook, its competitiveness, and the increasingly questionable durability of its moat.
As a result, despite the headline “cheapness,” I still view LULU as a hard sell for long-term-oriented investors at this stage. Until the company proves it can restore product momentum, rebuild brand relevance in the U.S., and stabilize margins without relying on heavy discounting, the risk-reward remains unappealing.
The discounted multiple is not a margin of safety, but a rational reflection of a structurally riskier investment case.
I am keeping my end-of-2027 price target roughly the same at $231, which reflects poor potential annualized returns of 4%. For now, the risk-reward still isn’t appealing.
I would look for a pullback below $170 before considering buying any shares, if at all. There are simply many more compelling businesses out there.
Rating: Sell - Accumulate below $170
FY27 Target Price: $231
Implied CAGR from the current price: 4%
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Great analysis. Sub $170 would be a good entry point. It looks a little toppy now after its lows and I'd expect any sign of weakness to send rumbling again