Lululemon (LULU), the premium athletic apparel retailer, is set to report its third-quarter earnings on December 5th. I remain bullish on the company heading into the report, as the most recent quarter marked a pivotal moment in the investment thesis. Despite significant stock price declines this year, investors have adjusted their expectations, recognizing that Lululemon is transitioning from a high-growth phase to one of maturity. While the company faces macroeconomic headwinds and increasing competition, its fundamentals remain strong, especially in terms of operating margins.
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In this article, I will outline Lululemon’s performance throughout the year, explain why Q2 was a crucial turning point for the bullish thesis, and discuss what investors can expect from the company in Q3.
Lululemon Faces a Challenging 2024 Head-On
To begin, despite a challenging period of losses for its shareholders, I remain optimistic about the company’s prospects, particularly given its more de-risked valuation multiples.
Lululemon shares have fallen by around 35% this year (at one point down roughly 50%), significantly underperforming the S&P 500 (SPY) for several reasons. At the end of last year, however, the stock surged to an all-time high, driven by the company’s strong earnings and revenue growth, which exceeded market expectations. It’s important to note that the macroeconomic environment at that time was very different—inflation concerns had eased, and the overall economic outlook was more optimistic.
With a solid balance sheet and high valuation multiples—averaging a 48x P/E ratio over the past five years—Lululemon’s bullish outlook was strengthened during this period of reduced risk aversion. That said, in 2024, the macroeconomic landscape shifted. Concerns over inflation resurfaced, leading to increased pressure on consumer spending. As a result, Lululemon’s guidance for 2024 fell short of the high market expectations that had been built up, contributing to a decline in its premium valuation. The stock now trades at half of its historical 5-year average P/E ratio.
Lululemon’s Q2: Recapping the Performance
While little in Lululemon’s Q2 report would, in theory, strengthen a positive outlook for the company, it surprisingly did. But let’s start with the bad news. The second quarter of Fiscal 2025 marked the sixth consecutive quarter of slowing sales overall, including in the Americas region, particularly in the U.S., which was flat for the quarter. Comp sales also turned negative in the Americas, possibly for the first time in the company’s history.
Additionally, although Lululemon beat earnings expectations by delivering $3.15 per share—$0.21 above estimates—it failed to meet top-line expectations, reporting $2.37 billion in revenue, which reflected only 7% annual growth. For analysts like Aneesha Sherman of Bernstein, Lululemon’s situation is best described as a shift from growth to maturity. She stated, “This is a company that has grown well above the sector for years and is now facing a consumer that’s pulling back.”
However, despite the initial bearish reaction to the company’s results, Lululemon shares have gradually risen by nearly 25% since Q2. I believe this recovery reflects the market’s perception that Lululemon’s fundamentals remain solid, even as it transitions into a mature phase. The recent share price contraction presents an opportunity to buy at lower levels. This is because LULU’s gross margins came in at 59.6% while operating margins reached 22.8%—both the highest in the company’s history. This demonstrates the company’s strong ability to maintain profitability, even when facing challenges.
Lululemon’s Q3: Focusing on Margins
I remain bullish on Lululemon stock ahead of its Q3 earnings report, set for December 5th. Management’s guidance, as of late August, anticipates revenues between $2.34 billion and $2.37 billion, reflecting an annual growth rate of 6-7%. Earnings per share are expected to range from $2.68 to $2.73.
While a beat or miss on top or bottom-line results doesn’t always result in significant stock movement, I remain optimistic about the company’s prospects. With retail trends becoming more favorable as we approach the holiday season and a strong U.S. consumer, I believe Lululemon is well-positioned to meet its full-year revenue guidance of $10.375 billion to $10.475 billion (representing nearly 8.5% year-over-year growth). Diluted EPS is expected to range between $13.95 and $14.15, reflecting about 10% year-over-year growth.
Perhaps even more crucial for investors is the company’s ability to maintain strong operating margins, which reached an all-time high in Q2. Additionally, while comparable store sales in the Americas came in negative, the outlook for improved sales figures in the coming months adds to my confidence in the company’s performance.
Is LULU A Buy, According to Wall Street Analysts?
At TipRanks, LULU stock is rated as a Moderate Buy, with 12 out of 17 analysts covering the stock offering a bullish recommendation. Four analysts have a neutral stance, while only one has a bearish outlook. The average price target for LULU is $335.07, suggesting a modest upside of approximately 4.5%.
Conclusion
The bullish investment thesis for Lululemon has evolved over the course of the year, shifting from expectations of exponential growth to a more mature business outlook, given the more challenging consumer spending environment and increased competition. However, the company’s fundamentals remain solid, with profit margins at all-time highs, highlighting its strong operational capacity. While Q3 is likely to face pressure from macroeconomic headwinds, there is potential for continued margin improvement, which could satisfy investors.
I believe that investors purchasing Lululemon shares—currently trading nearly 50% below its average P/E ratio—are making a relatively low-risk investment in a margin-rich retailer. This is especially true given that the company’s multiples have adjusted from a high-growth phase to one of maturity over the past year.
