Lululemon's Valuation Discount Sparks Contrarian Interest, But DeepValue Urges Caution on US Turnaround

What happened

Lululemon is navigating a fragile turnaround with its core US business struggling, as evidenced by a 2% Americas revenue decline in Q3 and a 290 bps gross margin compression to 55.6% due to tariff headwinds and increased promotions. International growth, especially in China which now contributes 20% of revenue, remains strong and partially offsets domestic weakness, supporting consolidated growth. A recent Seeking Alpha article positions the stock as a contrarian pick for 2026, citing a deep valuation discount and management's action plan targeting product innovation and cost efficiencies to revive US growth. However, DeepValue's master report highlights that structural issues—including negative US comparable sales, a projected $320M tariff impact in 2026, and heavy markdowns—lack clear evidence of near-term resolution, justifying a 'WAIT' rating. Investors should monitor key catalysts like the Q4 FY25 earnings in March 2026 and the Spring 2026 product reset for signs of US demand inflection and margin stabilization before considering an entry.

Implication

The current investment setup is asymmetric: international strength provides a floor, but US turnaround risks are high due to entrenched promotions and tariff drag that threaten brand equity and earnings. Valuation at 13.7x trailing EPS is optically cheap, but it already discounts slower growth and compressed margins, leaving little upside without proof of operational improvement. Management's action plan must deliver on increasing new style penetration and reducing markdowns by mid-2026 to restore confidence, with the Spring product reset as a critical test. Key near-term catalysts include the FY26 guidance in March, which will reveal management's confidence in US recovery and tariff mitigation, and the permanent CEO appointment, which could impact strategic direction. Without confirmed inflection points in US comps and gross margin, capital is better preserved in a wait stance, with an attractive entry around $180 if positive trends emerge.

Thesis delta

The Seeking Alpha article introduces a contrarian bullish view based on valuation, but it does not materially shift DeepValue's thesis, which remains grounded in SEC filings showing unproven US demand and margin stabilization. The core call stays a 'WAIT' until evidence from upcoming financial disclosures and product cycles validates a turnaround, as the article's optimism overlooks the depth of structural challenges highlighted in the report.