Lululemon's Stock Decline Highlights Valuation Gap Amid Persistent Headwinds

What happened

A recent article notes that Lululemon's stock turned $1,000 into $571 over three years, underscoring significant underperformance despite the company remaining profitable. The DeepValue report reveals that FY2024 delivered $10.6B in net revenue with margin expansion, but 2025 has brought challenges including a 4% decline in Americas comparable sales and gross margin compression to 58.5%. Tariff impacts are estimated to reduce gross profit by ~$240M, exacerbating pressure from rising U.S. competition with brands like Alo and Vuori. International growth, particularly in China, offers a counterbalance, yet investor sentiment has been dampened by guidance cuts and multiple downgrades. Despite this, the report maintains a BUY rating, citing undervaluation at a P/E of 11 and a strong balance sheet with negative net debt.

Implication

The stock's decline reflects tangible headwinds such as tariff pressures and competitive erosion in the U.S., which could persist and limit upside if not managed effectively. However, at a P/E of 11 and with a DCF model suggesting significant intrinsic value, there is a margin of safety for patient investors willing to overlook short-term volatility. International expansion, especially in China, provides a durable growth runway that may offset domestic softness over time. Critical watch items include Americas comparable sales trends and gross margin stabilization, as deterioration here would challenge the bullish thesis. Ultimately, while the brand's moat and cash generation support a long-term view, the investment case hinges on successful navigation of cyclical pressures without further earnings degradation.

Thesis delta

The news article reinforces the stock's poor recent performance, which is consistent with the headwinds outlined in the DeepValue report but does not introduce new fundamental data to alter the BUY thesis. However, it highlights that investor patience is being tested, and any failure to stem Americas declines or mitigate tariff impacts could accelerate a shift toward a more neutral stance. The core valuation argument remains intact, but increased scrutiny on execution is warranted given the prolonged underperformance.