Lululemon Downgraded to Sell as CEO Resignation Rally Masks Deepening Americas Weakness and Prolonged Uncertainty

What happened

Lululemon's stock saw a relief rally following CEO Calvin McDonald's resignation, but this pop is misleading as it doesn't reflect underlying operational challenges. Q3 2025 results showed a 5% decline in Americas comparable sales and gross margin compression to 55.6%, despite exceptional 24% growth in China buoying overall numbers. The leadership transition introduces prolonged uncertainty, with meaningful strategic impact unlikely before 2027, delaying potential fixes for core issues. DeepValue analysis indicates the stock trades about 17% above intrinsic value (~$205 vs. ~$175 DCF), with inventories up 11% year-over-year and tariff headwinds adding pressure. Investors should look beyond the temporary price movement to persistent weaknesses in the key U.S. market and elevated execution risk.

Implication

Lululemon's CEO resignation does not solve its core problem of negative Americas comps and margin erosion, which are likely to persist amid competition and tariffs. The prolonged leadership transition until 2027 adds strategic uncertainty, delaying any meaningful turnaround and increasing execution risk during a critical period. While international growth, especially in China, remains strong, it is insufficient to fully offset domestic declines or justify current valuations above intrinsic value. Persistent inventory build and tariff impacts threaten further gross margin compression, undermining free cash flow and the company's ability to sustain aggressive buybacks. Investors should wait for clearer evidence of U.S. stabilization, inventory normalization, or a lower entry price before considering a position, as the risk/reward remains unfavorable.

Thesis delta

The DeepValue report maintained a WAIT rating due to Americas weakness, overvaluation, and leadership uncertainty. The new article's Sell downgrade and emphasis on delayed strategic impact until 2027 reinforce this cautious stance, shifting the thesis towards greater bearishness if operational deterioration continues without timely resolution. This aligns with the report's watch items but highlights a longer timeline for potential recovery, increasing near-term downside risk.