Lululemon Earnings: Brand Intact Despite Sales Miss and Disappointing Outlook; Shares Attractive

Key Morningstar Metrics for Lululemon Athletica

• Fair Value Estimate: $305
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Lululemon Athletica’s Earnings

Lululemon’s LULU second-quarter sales increased 7% but Americas (70% of total) same-store sales fell 4%. The firm’s gross margin fell 110 basis points to 58.5% on higher markdowns and tariffs, and its operating margin dropped to 20.7% from 22.8%. More significantly, full-year guidance was reduced.

Why it matters: Lululemon’s sales growth missed our 8% estimate and has fallen below long-term targets in the Americas due to increased competition, lower spending on sportswear, and weaker demand for some core styles. Meanwhile, higher tariffs are expected to pressure margins.

• Full-year 2025 sales guidance was lowered by about 3% to $10.85 billion-$11 billion, and EPS was cut to $12.77-$12.97 from $14.58-$14.78. Tariffs are expected to have a 220-basis-point negative impact on the gross margin, worse than the 40-basis-point impact previously expected.
• Despite the reduced guidance, Lululemon’s second-quarter operating margin exceeded our 19% estimate, and we think consumers are responding well to its newer merchandise. Moreover, international sales rose 22% in the quarter and should drive most of the long-term sales growth.

The bottom line: We expect to reduce our $305 per share fair value estimate on narrow-moat Lululemon, but only by a low-single-digit percentage. Shares fell by a midteens rate to multiyear lows in Sept. 4 after-hours trading, but we think there is an opportunity for long-term investors.

• The tariff impact could be transitory if Lululemon can mitigate it through price increases and supply changes, if policies change, or the tariffs are ruled to be illegal. We think the company has the products and popularity to hold operating margins above 20% in the long run.
• Lululemon exited the quarter with $1.2 billion in cash and no debt and is on pace to exceed our $1.1 billion full-year share repurchase forecast. Given the discount on our valuation, we think buybacks create value for shareholders and maintain our Exemplary Capital Allocation Rating.