Lululemon Stock Drops 10% as U.S. Weakness and Tariffs Bite, but DeepValue Sees Undervaluation

What happened

Lululemon's stock has fallen 10% over three months, driven by soft U.S. demand, margin compression, and tariff impacts that align with warnings in recent SEC filings. The DeepValue report confirms these headwinds, noting a 110 bps gross margin decline and an estimated $240 million gross profit hit from tariffs in 2025. Despite this, international segments like China show robust growth, and product innovation efforts aim to offset domestic challenges. DeepValue maintains a BUY rating, citing a low P/E of 11x and a DCF valuation significantly above the current share price, suggesting the stock is undervalued. However, persistent U.S. competitive pressures and tariff uncertainties could prolong the downturn if not managed effectively.

Implication

The stock's decline highlights heightened risks from U.S. softness and tariffs, which could erode earnings if not mitigated, demanding scrutiny of quarterly comparable sales and gross margin reports. DeepValue's BUY thesis relies on international growth and a strong balance sheet, but failure to stabilize Americas performance may undermine long-term returns. Tariff impacts, estimated at $240 million, pose a tangible threat to profitability, and investors should assess management's mitigation efforts in upcoming earnings. Conversely, the low P/E and negative net debt provide a margin of safety, making Lululemon attractive for those betting on a cyclical recovery. Ultimately, a disciplined approach is needed, with exits triggered if U.S. comps worsen or international growth stalls unexpectedly.

Thesis delta

The recent stock drop reinforces DeepValue's identified headwinds, such as tariff pressures and U.S. competitive intensity, but does not alter the core BUY thesis given the valuation cushion and international strengths. However, continued deterioration in Americas comps or margins beyond current estimates would necessitate a reassessment toward a more cautious stance.