10 July 2025, USA, New York: The Lululemon logo can be seen on a store in Manhattan. Photo: Sven Hoppe/dpa (Photo by Sven Hoppe/picture alliance via Getty Images)
dpa/picture alliance via Getty Images
Lululemon stock (NASDAQ: LULU) has emerged as one of the more divisive names in the market for 2025. A mix of guidance reductions, tariff challenges, and decreasing product momentum has resulted in a 56% decline in shares year-to-date, while the S&P 500 has risen by 10%. This discrepancy raises an important question: has the market reacted excessively, or are the threats to growth and profitability more fundamental?
Valuation introduces another dimension to this discussion. Once regarded as a high-growth premium brand, Lululemon is now trading at just 14 times trailing earnings, presenting a discount compared to its historical average and the market’s 24 times multiple. Financially, the company continues to yield strong margins, returns on capital, and free cash flow. With a market cap of $20 billion and $1.4 billion in trailing free cash flow, the stock offers a cash flow yield of nearly 7%. When compared to competitors like Nike, this positioning seems appealing — although whether the multiple will adjust upward relies on management’s capability to stimulate U.S. demand while managing rising costs.
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Q2 Results: A Reset, Not a Collapse
Lululemon exceeded earnings expectations with an EPS of $3.10 compared to estimates of $2.87, though revenue slightly missed at $2.53B against projections of $2.54B. The main issue, however, was the reduction in guidance.
The company lowered its full-year revenue forecast to $10.85B–$11.0B (down from $11.15B–$11.3B) and EPS to $12.77–$12.97 (down from $14.58–$14.78). This adjustment, rather than the quarterly performance itself, caused the most recent selloff in the stock.
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Lululemon’s U.S. same-store sales in Q2 FY 2025 decreased by 4%, indicating ongoing weakness in its core domestic market. Conversely, same-store sales increased by 17% in China and by 12% across other international markets.
Key Pressures
Lululemon is contending with various challenges beyond its guidance. The elimination of the U.S. de minimis exemption will result in roughly $240 million in additional import duties, leading to an overall operating cost impact estimated at around $320 million by 2026. Management has also recognized brand fatigue, with CEO Calvin McDonald mentioning that the assortment has grown “too predictable.” To address this issue, the company intends to refresh its offerings, increasing the proportion of new styles from 23% to 35% by next spring.
Financial Strength Few Can Match
Lululemon concluded the quarter with $1.2 billion in cash, which represents 15.4% of total assets, against $1.7 billion in lease liabilities, its primary form of debt. This results in a conservative debt-to-equity ratio of merely 8.3%. With no traditional debt on the balance sheet and substantial liquidity, the company is well-equipped to withstand short-term disruptions without compromising its growth ambitions.
The Caution: This Journey Isn’t Smooth
There’s no denying it: Lululemon has a track record of significant declines during market corrections. It decreased by 46% in the downturn of 2022 (compared to the S&P’s 25%), fell 47% during the early 2020 Covid shock (versus 34%), and faced a severe drop of 92% in the 2008 crash (in contrast to 57%). Investors must recognize that with LULU, strong fundamentals do not always provide protection against sharp changes in sentiment. View LULU Dip Buyer Analyses to discover how the stock has bounced back from significant dips in the past.
Buy with a Touch of Volatility
Lululemon’s fundamentals — solid margins, global growth, and a clean balance sheet — remain robust, while the stock’s valuation has adjusted to attractive levels. The business continues to be premium, but the price is no longer reflective of that.
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