Lululemon's Cheap Valuation Clashes with Persistent U.S. Weakness and Execution Risks

What happened

Lululemon's stock has fallen 48% over the past year, trading at a forward P/E of 14x, which a Seeking Alpha article notes is cheap versus peers and suggests risks are largely priced in. However, the DeepValue report reveals deteriorating fundamentals, with Americas comparable sales declining 5% in Q3 2025 and gross margin compressing by 290 basis points due to markdown pressure and macro headwinds. International segments, especially China with 24% comp growth, provide a growth offset, but this is countered by tariff impacts estimated at $210 million and rising competition from brands like Alo and Vuori. Management is addressing internal issues and expanding in China, as highlighted in the article, yet the DeepValue analysis indicates the stock still trades 17% above DCF-based intrinsic value, implying the market has not fully de-risked the U.S. slowdown. Overall, while valuation appears attractive, ongoing execution gaps and uncertain stabilization in the core Americas market justify a cautious stance.

Implication

Lululemon's low forward P/E of 14x may seem compelling, but it reflects real challenges: negative Americas comps and margin erosion that undermine near-term earnings stability. The strong international growth, particularly in China, offers a long-term runway but is not sufficient to offset immediate headwinds like tariffs and competitive pressures without proven execution. Management's focus on internal fixes and expansion is positive, yet past missteps like the MIRROR impairment highlight capital allocation risks that could recur. Despite the stock's significant decline, it remains overvalued per DCF analysis, indicating limited margin of safety if U.S. trends worsen or international growth slows. Therefore, investors should monitor key watch items—Americas comps, inventory levels, and cash flow—before considering an entry, as the risk-reward is balanced rather than asymmetric.

Thesis delta

The Seeking Alpha article reinforces that Lululemon's risks are recognized in its valuation but does not alter the fundamental thesis of caution due to execution risks. It emphasizes potential reward from international expansion, yet the DeepValue report's analysis shows no shift in the core concerns: U.S. weakness persists, margins are under pressure, and the stock is not yet cheap enough relative to intrinsic value. Thus, the thesis remains unchanged, advocating for patience until clearer signs of stabilization emerge.