To The Moon

$Lululemon Athletica(LULU)$

By any measure, 2025 has been a punishing year for Lululemon shareholders. With the stock down more than 37% year-to-date, the once high-flying premium athletic apparel brand has seen its market capitalization shaved by billions. The selloff has left many investors understandably questioning whether the company has lost its competitive edge — or whether this steep decline represents a rare buying opportunity.

In this analysis, we examine what Lululemon’s management had to say during its most recent earnings call, including insights on revenue growth, profit margins, tariff headwinds, and its evolving international footprint. We also assess the brand’s competitive positioning versus rivals like Nike, and evaluate whether the company’s strategic approach to brand equity and customer engagement remains intact. Finally, we offer a clear recommendation for investors navigating this turbulent market backdrop.

Revenue Surpasses Expectations Despite Geopolitical Headwinds

For all the doom-and-gloom headlines surrounding Lululemon this year, the company delivered some encouraging news in its most recent quarter: revenue came in at the high end of management’s guidance range. That alone signals resilience in the face of significant headwinds.

In the U.S. — its largest market — revenue ticked up 2% year-over-year, reversing a worrying soft patch from previous quarters and notably outperforming Nike, which posted a roughly 10% decline in the same period. This suggests that even as U.S. consumers become more cautious, Lululemon continues to capture market share in the premium athletic wear category.

Perhaps most importantly, management reaffirmed full-year revenue guidance. That guidance provides investors a measure of confidence, particularly in light of newly implemented U.S. tariffs on imported goods — a major concern given that Lululemon manufactures most of its products abroad. Those tariffs represent a meaningful drag on profitability, and were a primary reason we urged caution earlier this year. However, after carefully parsing the company’s most recent earnings report, we believe that risk is now adequately reflected in the stock price.

An Upgrade to Buy: Valuation Meets Fundamentals

After maintaining a cautious stance for much of 2025, we are upgrading Lululemon to a buy based on three key factors: strong fundamentals, a compelling valuation, and evidence of continued competitive strength.

The company posted 7% revenue growth in the first quarter, alongside a 60-basis-point improvement in gross margin, bringing margins to an impressive 58.3% — among the highest in the industry. By comparison, Nike’s gross margin recently hovered closer to 40%, underscoring Lululemon’s pricing power and operational efficiency.

Earnings per share also exceeded internal forecasts, and the company continued its shareholder-friendly capital allocation strategy by repurchasing $430 million of stock during the quarter. Those share buybacks signal management’s confidence in the long-term value of the business and help mitigate dilution from equity-based compensation.

A Smarter Strategy: Brand Equity Over Price Wars

One of the most encouraging aspects of Lululemon’s strategy is its refusal to engage in the destructive price wars that have eroded margins across other industries — most notably in electric vehicles. Tesla, for example, initiated a price-cutting spree in 2024 that forced competitors to follow suit, with devastating consequences for profitability across the sector.

Lululemon has avoided that trap. Rather than slashing prices to boost volumes, it has deepened its connection to customers through community-based events, local brand activations, and a product line that emphasizes both high performance and high style. This approach has maintained the brand’s premium positioning, reinforced customer loyalty, and allowed the company to sustain industry-leading margins.

As investors, we appreciate this focus on differentiated value rather than commoditized competition. It is precisely this strategic discipline that has enabled Lululemon to continue gaining market share even in a challenging macroeconomic environment.

Geographic Diversification: A Hedge Against Tariff Risks

Lululemon’s geographic diversification is another critical factor supporting our upgrade.

In Canada, sales grew 9%, and U.S. sales — while modest at 2% — still outpaced the broader market. Importantly, the company continues to capture share across both men’s and women’s premium athletic apparel. The men’s segment, in particular, remains a large under-penetrated opportunity for future growth.

International performance has been even more impressive. Revenue in China surged 22% despite a growing aversion to U.S. brands among Chinese consumers — a headwind that has weighed heavily on peers like Nike, Apple, Starbucks, and Tesla.

Beyond China, international sales climbed 17% across the Asia-Pacific region, as well as Europe, the Middle East, and Africa. This diversification mitigates the company’s exposure to U.S. tariffs by allowing it to redirect inventory and production to markets where trade policy is less punitive. In short, it provides management greater flexibility to maintain production scale without sacrificing margins to tariff costs.

Competitive Advantage Remains Intact

In our view, the hallmark of a great company is its ability to maintain — and even strengthen — its competitive advantages in adverse conditions. On that measure, Lululemon continues to deliver.

It remains a trusted premium brand with an entrenched customer base and growing global recognition. It has maintained superior gross margins by avoiding the race to the bottom on price. And it continues to innovate in how it engages customers, particularly at the community level — a unique strategy in the increasingly crowded athleisure market.

While we remain mindful of macroeconomic headwinds and geopolitical risks, these appear to be cyclical pressures rather than structural impairments. The company’s balance sheet remains healthy, its brand equity intact, and its growth opportunities significant — particularly in international markets and the men’s category.

Valuation: Attractive After a Steep Decline

Perhaps the most compelling reason to upgrade our recommendation now is valuation. After a 37% decline in 2025, the stock is now trading at levels that reflect considerable pessimism — despite continued top-line growth, market share gains, and industry-leading profitability.

For long-term investors with a multi-year horizon, this creates an appealing entry point into a high-quality franchise that has demonstrated its resilience.

Final Takeaways: A Quality Business on Sale

To summarize:

• Lululemon delivered better-than-expected revenue growth, maintained strong margins, and reaffirmed full-year guidance despite a challenging macro backdrop.

• The company continues to gain market share at home and abroad, with particularly strong growth in China and other international markets.

• Management’s strategic discipline — focusing on brand equity over price cuts — has preserved profitability and competitive positioning.

• Geographic diversification provides flexibility in managing tariff exposure.

• At current levels, the stock offers an attractive risk/reward profile for long-term investors.

While near-term volatility is likely to persist, we believe Lululemon remains a best-in-class operator in its category and that the current share price undervalues its durable competitive advantages.

Verdict: Buy.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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