The Canadian premium “athleisure” giant Lululemon Athletica (LULU) is facing its biggest crisis in years, with shares losing more than half their value this year. Q2 results, released earlier this month, were another bloodbath: the company cut guidance, management blamed tariffs and macro headwinds, and even admitted to missteps in keeping up with retail fashion trends.
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Analysts have since slashed growth projections across the board, leaving the stock trading at its steepest discount in years. Still, that discount may be justified, as it’s increasingly hard to see where the bottom is—and whether the company’s best fundamentals are already behind it.
Without drastic innovation (or maybe even leadership changes), an earnings downward spiral could easily become the new normal. That said, despite the valuation looking tempting on paper, I see LULU as a Hold for now.
The Fall of the Premium Athleisure King
Lululemon’s slump, particularly after its Q2 results, can be attributed to several key factors. First, revenues were weak, coming in at $2.53 billion for the quarter—up 6.8% year-over-year and 6% on a comparable basis, but about $40 million below expectations.
The biggest issue was the continued weakness in the U.S., where comparable sales fell 3%, worsening from a 1% decline in Q1. This offset the strong international growth of 13% on a comparable basis. This underperformance forced management to revise full-year guidance, now forecasting 2-4% revenue growth (down from 7-8%) and EPS guidance cut from $14.68 to $12.77–12.97.
Another factor was management putting too much emphasis on tariffs and the removal of the de minimis exemption for goods shipped from Canada—around two-thirds of Lululemon’s online orders come from there. Finally, rising competition and the brand’s struggle to keep up with trends played a role. Management noted that only 23% of the product mix this year is new, though they aim for 35% next year.
Why Lululemon is Losing Its Premium Edge
In my view, pricing power is probably the most critical aspect of Lululemon’s investment thesis. After all, the company positions itself as an aspirational brand, with prices well above its athleisure peers—leggings at ~$100 and tops at ~$60—which helps deliver gross margins close to 60%, compared to the industry average of ~39%.
The massive growth Lululemon experienced between 2015 and 2023 wasn’t just in market value or sales volume, but in North American consumers consistently paying more for basic athleisure items. This enabled the brand to lead the narrative of “accessible athleisure luxury” more effectively than any of its global peers.
The problem is that, at least from 2024 onwards, things have shifted. Pricing power isn’t just about charging high prices—it’s about why customers continue paying them. If premium consumers start seeing brands like Alo and Vuori—which have quickly gained traction—as more appealing in terms of design, marketing, and lifestyle, Lululemon’s premium status loses its justification.
Lululemon has also faltered by failing to innovate, a critical misstep in fashion. The company has relied on
“aging” collections, missed emerging trends, and launched poorly received products like “Breezethrough,” which was eventually pulled from the market due to fit issues. In contrast, Alo Yoga embraced a “quiet luxury” aesthetic, betting on minimalist designs and glossy fabrics, while also growing paid traffic and aggressively leveraging TikTok and influencer marketing—boosting digital engagement and brand visibility.
Eroding Margins and Guidance Risks
Although management has emphasized that “no single competitor is having a meaningful impact on our business,” they also acknowledged that there are many players in the market. In my view, Alo Yoga and Vuori have been key drivers of Lululemon’s sales decline, alongside weaker consumer spending in recent years. Higher markdowns are another warning sign for a brand that aims to sell premium products.
In Q1, markdowns contributed 50 basis points to the annual decline in gross margins. In Q2, gross margins declined 110 basis points compared to Q2 2024, with markdowns and tariffs accounting for 80 basis points, resulting in a gross margin of 58.5%.
Even more concerning, as Jefferies analyst Randy Konik notes, soft spring performance typically leads to weaker back-to-school and holiday sales, suggesting ongoing pressure. This raises the likelihood that Lululemon’s guidance is not conservative enough. Analysts currently expect Q3 sales of $2.48 billion and EPS of $2.21, roughly 3% and 25% below prior projections, respectively.
The brighter side is that the current valuation may already reflect this pessimism. Trading at an 11.5x forward earnings multiple, Lululemon is at its lowest multiple in three years and about 30% below the sector average, despite operating margins remaining in line with its historical average over the past three years—even matching levels from early 2024, when LULU shares traded at a forward P/E above 40x.
Is LULU a Buy, Hold, or Sell?
Wall Street analysts are highly skeptical about LULU, with 16 out of 22 recommending Hold, five recommending Buy, and just one recommending Sell. Despite a wave of downgrades and price cuts after Q2, LULU’s average target price stands at $199.95, implying a potential upside of almost 19% from the current share price.
Too Much Uncertainty on How Far the Bottom Is In
Retail fashion is a tricky business, with constantly changing trends and fierce competition always looking to undercut each other.
I believe Lululemon desperately needs product innovation for any chance of a turnaround. Emerging brands like Alo and Vuori are pinching Lulu’s lunch, and even though the company still boasts a strong balance sheet and best-in-class margins, the risk of prolonged erosion over the coming quarters could lead to further multiple compression.
I also see a management team that is overly blaming tariffs, when in reality, markdowns and misaligned customer positioning have undermined the growth thesis. As long as comp sales trends in the U.S. don’t shift in the coming quarters, strong margins alone aren’t enough to reverse momentum. For now, I see LULU as a Hold, as it’s not yet the right time to try catching this falling knife.