While the major indices are trading near record highs, shares of Canada-based athleisure giant Lululemon Athletica (NASDAQ: LULU) are trading 45% below all-time highs. Despite the recent pullback, LULU stock has returned over 550% to shareholders in the last ten years, easily outpacing the broader markets.
Valued at US$34.3 billion by market cap, Lululemon stock is wrestling with a deceleration in sales growth and falling profit margins due to sluggish consumer demand and headwinds such as inflation and elevated interest rates. Let’s see if LULU stock is a good stock to own at the current multiple.
A weak quarter in fiscal Q2 of 2025
Lululemon Athletica designs, distributes, and retails athletic apparel and accessories for women and men. In the fiscal second quarter (Q2) of 2025 (ended in July), Lululemon posted its first revenue miss in over 24 months due to slowing growth in the Americas and a highly anticipated product launch that failed to meet expectations.
It now forecasts sales between US$10.38 billion and US$10.48 billion, down from its previous midpoint guidance of US$10.75 billion. It forecast adjusted earnings at US$14.05 per share, below its prior guidance of US$14.37 per share.
In the July quarter, it reported revenue of US$2.37 billion with adjusted earnings of US$3.15 per share, compared to estimates of US$2.41 billion and US$2.93 per share, respectively. While sales rose by 7% year over year, its net income rose to US$393 million, up from US$342 million last year.
Lululemon’s comparable sales rose by 2%, below consensus estimates of 5.9%. Comparable sales in the Americas were down 3%, and this trend is unlikely to change in the near term. In the current quarter, Lululemon forecasts sales growth between 6% and 7%, below analyst estimates of 9.2%.
Notably, Lululemon’s fiscal Q3 earnings guidance of between $2.68 per share and $2.73 per share was in line with estimates of $2.70 per share.
One key factor in Lululemon’s listless growth forecast is the Breezethrough leggings product, which was pulled from the markets due to its unappealing fit. Several users complained about the product, which impacted company sales in Q2.
Lululemon also explained that its women’s business slowed down in the U.S. due to the lack of new styles across product categories. However, the retail giant is optimistic about its strong brand presence in North America, making it an enticing investment option right now.
Is LULU stock undervalued?
Lululemon has focused on improving profit margins amid slowing demand. In Q2, its gross profit rose 9% to US$1.4 billion, indicating a margin of 59.6%, above estimates of 57.7%. Its operating income rose to US$540.2 million, up from US$479 million in the year-ago period, an increase of almost 13%.
Wall Street expects Lululemon sales to rise 8.5% to US$10.43 billion in fiscal 2025 and 7.2% to US$11.2 billion in fiscal 2026. International markets such as China will be key sales drivers as the segment increased revenue by 29% in Q2.
Comparatively, adjusted earnings are forecast to expand from US$12.77 per share to US$14.9 per share in this period. So, priced at 18.8 times forward earnings, LULU stock is cheap as it wrestles with a tepid macro environment. Analysts remain bullish and expect LULU stock to surge over 15% in the next 12 months.
