Last Update 05 Jun 26
Fair value Decreased 32%Lululemon Guided Soft in March and Softer in June. I'm Buying the Second Punch
Six weeks ago I wrote that a premium apparel brand earning enormous returns on capital had been marked down like it owed the crowd money. The stock was $143. I said buy a starter, keep your powder dry, and add if it fell another fifteen percent.
It fell another twenty two. The after-hours quote is about $111. The crowd did exactly what I told you it might.
So here is the only honest thing to do. I wrote down, in advance, the four things that would prove me wrong. The company just reported. Let me check my own scoreboard in front of you instead of quietly moving the goalposts the way most people do when the price goes against them.
The Scoreboard I Wrote Before the Quarter, Marked Against the Quarter
I gave you four conditions. Any one of them and the thesis is broken. None of them and you sit on your hands. Here they are, graded.
Condition one. Gross margin breaks fifty three percent on a trailing basis. That would tell you the markdown habit has gone structural. Q1 gross margin came in at 54.2%, down four hundred and ten basis points. That is ugly. It is also a single quarter, and the trailing number still sits around 55.7%, above the line I drew. Not tripped. On the watch list, with a red light blinking.
Condition two. Americas same store comps decline more than five percent for two quarters in a row. That would tell you the brand problem is no longer a product cycle problem. Americas comps fell five percent as reported and six percent in constant currency in Q1. That is one quarter at the line and, in constant currency, through it. The clock is now running on the second. This is the condition I am watching above all others, because it is the one that decides whether this is a headache or a tumor.
Condition three. Net debt appears on the balance sheet to defend the buyback. That would tell you management confused returning capital with destroying it. It did not happen. The company still sits on roughly $1.5 billion of cash and no funded debt. The fortress is intact.
Condition four. The new chief executive leaves inside eighteen months. She has not started. Heidi O'Neill, who came up running product and consumer at Nike, takes the chair on September 8. You cannot quit a job you have not begun.
So the count is one condition half tripped, one condition flashing amber, two conditions clean. The thesis is not broken. It is being tested in the exact place I said it would be tested. That is not a reason to flinch. It is a reason to pay attention to the right number, which is the Americas comp, and to stop staring at the ones that do not matter.
What Actually Happened, in Plain Numbers
The headline that knocked the stock down roughly eleven percent after hours was the June guide-down on top of a soft March guide. Read that slowly. In March management said things would be soft. In June it said softer. That is the kind of thing that makes algorithms sell first and think never.
Underneath the headline:
Revenue grew four percent to $2.47 billion. Two percent in constant currency. Not a collapse. A stall.
The split inside that number is the whole story, and the crowd refuses to label the columns. Americas comps fell five percent, six percent in constant currency. China revenue grew thirty percent, twenty three percent in constant currency. Rest of World revenue grew thirteen percent, nine percent in constant currency. If you insist on comps, China was up twenty and Rest of World was up five. The part of the business that compounds is still compounding. The part that is sick is the home market.
Operating margin fell to 11.2% from 18.5%. Earnings per share came in at $1.69 against $2.60 a year ago. Management now expects full-year operating margin to fall roughly three hundred and eighty basis points year over year; tariffs are a major part of the hit, not the whole hit, and the guide assumes no IEEPA tariff refunds. Free cash flow last year was about $920 million, down forty two percent, on a free cash flow margin of around eight percent.
This is a business running at a fraction of its own potential while still throwing off nearly a billion dollars in cash and earning around thirty cents of operating profit on every dollar of invested capital. Read that sentence again. Thirty percent returns on capital is not the signature of a broken franchise. It is the signature of a very good one having a very bad year.
The One Line on Management That the Buyback Earned
I have to give them a demerit, and I will not pretend otherwise.
The company bought back 2.2 million of its own shares in the quarter at roughly $165. The after-hours quote is $111. They are underwater on capital they deployed weeks ago. There is still about a billion dollars of buyback authorization left.
Show me the incentive and I will show you the outcome. The lesson here is not that buybacks are bad. The lesson is that buying your own stock because it is "down" is not the same as buying it because it is cheap, and the people running the buyback did not wait to find out which one this was. I would rather they sat on that billion and used it lower. The good news, and it is real news, is that they had the cash to make the mistake without borrowing to do it. A company that funds its errors out of petty cash lives in a different universe from one that funds them with debt.
The Circus Left Town. That Changes the Math
When I wrote in April, the proxy fight was live and the board was getting squeezed from two directions. That is settled now. The founder's group reached an agreement on May 27. Laura Gentile and Marc Maurer join the board after the annual meeting, one more product-and-brand director comes by October 1, Wilson accepts an eighteen month standstill, and his stake is capped below 9.9%. Elliott still has more than a billion dollars riding on this.
The reflexive read is that the drama is over and therefore the excitement is gone. The correct read is the opposite. A large founder-owner just locked himself into the boardroom's orbit for the duration of the turnaround, and another billion-dollar activist is still staring at the same outcome. They are not here to write thank you notes. They are here because they want the stock higher, and the founder now has enough boardroom proximity to make the conversation harder to ignore. That is worth more than another consultant's slide deck.
The Lollapalooza Has Not Lifted. The Price Came to Meet It
Six weeks ago I told you most market disasters are several bad things compounding at once, and that Lululemon had all of them running in parallel. They are still running. A deteriorating home market. A leadership chair that stays empty until September. Tariffs. Markdowns. Momentum sellers who do not distinguish a stall from a death.
What changed is the price. In spring the stock was $143 and I argued the bear case was no longer far below the quote. Today the after-hours quote is $111, and the gap between the quote and the pessimistic case has nearly closed.
Run the cash flows again. A haircut base case, with low single digit revenue growth, partial margin recovery, a nine percent discount rate and a modest terminal, lands around $150 a share. Let the franchise heal toward its old normal and you are closer to $245. Push every input to gloom, model the Americas erosion as permanent the way it played out at Under Armour, and you land near $85. The after-hours quote is $111.
Here is the part worth sitting with. Work backwards from today's price and ask what the market is actually assuming. At $111, my reverse DCF says the quote is treating roughly $670 million of normalized free cash flow as the destination. Do not mistake that for a fact from Mount Sinai. It is the arithmetic under my discount-rate and terminal assumptions. That is still a permanent twenty seven percent decline from last year's free cash flow, with no recovery, ever, for a franchise still earning thirty percent on capital. The market is not pricing a rough year. It is pricing a slow funeral.
That might be right. The Americas comp will tell us. But you are not paying for optimism here. You are being paid to wait, and the downside is doing the unusual thing of getting smaller as the price falls, because the net cash and the lower multiple put a floor under the arithmetic that a story stock never has.
What I'd Do, in Plain Language, Again
I said buy a starter in spring and add fifteen percent lower. It is more than fifteen percent lower. So I am adding. Not backing up the truck. Adding the second rung, on schedule, the way you are supposed to when the thing you wanted to own gets cheaper for reasons you already underwrote.
I am keeping capital in reserve for a deeper cut, because a disciplined buyer assumes the bottom is lower than he thinks. If you want a number, the franchise gets genuinely hard to ignore in the low hundreds and below, and a full position belongs on a deeper washout rather than here.
And I am keeping the same four tripwires, because changing your sell rules the moment the price moves against you is how amateurs turn a thesis into a hostage situation. The Americas comp is the one that matters. One more quarter worse than five percent down and I will be back here telling you I was wrong, in writing, without flinching. Until then China revenue keeps compounding while the crowd watches Cleveland.
A Closing Thought, Still With No Question Mark
The hardest thing in this business is doing the same right thing twice when it looked dumb the first time and the price has since told you, loudly, that you were dumb to do it.
I wrote down what would prove me wrong before the quarter so I could not lie to myself after it. The quarter came. One light is amber, one is blinking, two are green. The price is the price. The numbers are the numbers. I am adding the second rung and I am watching one line on one income statement.
The crowd is welcome to its funeral. I have seen this body get up before.
A premium athletic apparel brand earns a 24% return on invested capital. It generates roughly $920 million of free cash flow on $11 billion of revenue. It has more cash than debt. It buys back its own shares. The market lets you have it for ten times trailing earnings and six times EBITDA.
You're supposed to find that interesting. Most people don't. That, as a rule, has been where the money tends to be.
The Crowd Has Decided This Is Boring. Look at What "Boring" Costs.
In a normal mood the crowd would pay roughly thirty times forward earnings for this business. They've done so often enough. They weren't insane to do it. The company compounded revenue at a 20% clip over five years, kept gross margins in the mid-to-high fifties, and turned a yoga mat brand into eight hundred and eleven stores across China, Canada, the United States, and a dozen smaller markets.
Now the same crowd will pay ten and a half. Their reasons, in plain English:
The Americas business slipped. Same-store sales fell one percent. Q4 revenue in the home market was down four.
Gross margin in the fourth quarter compressed by five hundred and fifty basis points. Five-five-zero.
Tariffs, that elegant thing they are, will cost roughly $380 million gross this year. Management thinks they can claw back $160 million.
Inventory is up eighteen percent year over year. Stale inventory becomes cheap inventory becomes margin compression next quarter.
Two competitors, Alo and Vuori, have been opening stores in the same premium retail corridors Lululemon used to own by default. They're taking some of the cool away. Cool, in apparel, isn't a metaphor. It's the moat.
The CEO left in January. The board, after months of hand-wringing under pressure from the founder and from Elliott Management, named a new one from Nike. The market sold the news off thirteen percent in a day. The new CEO doesn't start until September.
That's the bear case. It's not foolish. It's roughly the right list. I don't believe in pretending the trouble isn't there. The instinct to invert begins by looking at every reason you might be wrong, and only then deciding what you think.
What the Crowd Is Forgetting While It's Busy Being Right
Now invert. Read the same list as a buyer rather than a seller.
The Americas slipped one percent. International grew seventeen. China comps grew thirty. The crowd has decided the home-market problem is the whole story, and the international franchise, which is the part that compounds, has become a free option.
Gross margin compressed in one quarter. Last year it was 59%. The five-year median is roughly 57%. Apparel margins do this. They compress when the product cycle stales and recover when it refreshes. The new CEO came up through global product strategy at a company that had its own version of this exact problem. That's either a serious clue or it's an irrelevance. It is not, however, a reason to assume the margin never comes back.
Tariffs are a tax on bad geopolitics. They aren't a tax on the business model. They're also the kind of thing that gets mitigated by sourcing changes given two or three years. Aritzia did it. Pandora did it. A company that earns 24% on capital and runs a vertically integrated DTC channel is unusually well-positioned to push them around.
Alo and Vuori are real and growing. Alo is now a high-double-digit U.S. store chain. Vuori was already above eighty U.S. stores in 2025 and expected to pass one hundred stores in 2026. Lululemon still runs roughly three hundred and eighty stores in the United States and eight hundred and eleven globally. There's room for three winners in athleisure the way there's always been room for two or three winners in luxury. The question is whether share goes to one, two, or all three. The crowd is currently pricing one.
The proxy fight is a feature, not a bug. The founder's Schedule 13D group owns roughly 8.6%. Elliott has a billion dollars in. Both want governance change. Show me the incentive and I'll show you the outcome. These two parties, for purely selfish reasons, will not let this board sleep through the turnaround. That's worth more than another committee.
On Moats. Twenty-Four Cents on the Dollar Doesn't Lie. It Also Doesn't Predict.
A moat is whatever lets a business earn returns on capital that shouldn't be possible in a competitive market for as long as it does. You can argue about the philosophy. You can't argue about the arithmetic. Lululemon earned roughly twenty-four cents of operating profit on every dollar of invested capital last year. That kind of number doesn't happen by accident in apparel, where most companies don't clear their cost of capital with any consistency. Something is defending the franchise. The work is figuring out what, and how durable it is.
Here's what's actually doing the defending, in declining order of conviction.
Direct-to-consumer distribution. Lululemon sells essentially all of its goods through its own stores and its own website. That isn't normal in apparel. Nike still moves more than half its volume through wholesale. Department stores, off-price chains, and licensees take a cut and dilute the brand on the way through. Lululemon doesn't have those parties standing between it and its customer. That structural difference is worth several hundred basis points of gross margin, and it isn't going away.
Sales productivity. Roughly $1,400 per square foot in FY2025, down from $1,609 at peak but still above almost any soft-goods peer. That number is evidence the stores aren't just retail. They're physical advertising channels that happen to also generate revenue. You can't replicate that productivity by writing checks. You earn it by running the company well for fifteen years.
Fabric and fit. Luon, Everlux, Nulu, Align. Names trademarked and refined over more than a decade. The Align legging in particular is the closest thing to switching costs that exists in soft goods. Customers who fit Aligns tend to buy several pairs. Switching costs in apparel sound silly until you've watched someone try on six leggings substitutes and put the original back in the basket.
Community-driven retail. Local store ambassadors, free yoga classes, run clubs. It's marketing dressed as a hobby. Vuori isn't running six a.m. classes in Cleveland. Building that infrastructure takes a decade and a great deal of operator labor, and it's the part of the moat the financial press never bothers to model.
Now the part the crowd is right about. The brand-cool component of the moat is being tested in real time. Alo and Vuori have peeled off the trend-conscious twenty-something who used to default to Lululemon. Markdowns have increased. Q4 management used the words "product staleness" out loud, which is the kind of confession a CFO doesn't volunteer unless the data demands it.
What separates a permanent break in a moat from a temporary one is whether the cash-on-cash returns survive the stress. Lululemon's ROIC has come down from peak. It's still north of twenty percent. The DTC channel still works. Sales productivity still leads the category. The Align legging still sells. The thing being damaged is the marketing flywheel, not the underlying economics. The marketing flywheel is what the new CEO was hired to fix.
That's a treatable disease. It isn't stage-four cancer.
The Lollapalooza, in Reverse
Most disasters in the stock market are several bad things compounding at once. Deteriorating fundamentals. A leadership vacuum. An activist circus. A regulatory scare. Momentum sellers. Lululemon has all of them running in parallel right now. A reasonable person, looking at the list, decides he doesn't want to own it.
This is what makes a high-quality business cheap. You don't get a 24% ROIC compounder for ten times earnings when everything is running smoothly. You get it when several unrelated bad things happen simultaneously, and the algorithms stop trying to distinguish a temporary mess from a permanent one. The crowd, on average, is very intelligent. The crowd, in moments like this, is also given to mistaking a headache for a tumor.
The math here is not heroic, but it is sensitive. Run a discounted cash flow with low-to-mid-single-digit revenue growth, partial free-cash-flow margin recovery, a 9% discount rate, and a 2.5% terminal. A haircut base case lands around $205 a share. Let margins recover closer to their old normal and you get roughly $220. Push the inputs to pessimism and you land closer to $135. The stock is at $143.
The stock is not at a 35% discount to a stone-tablet fair value. It is closer than that. The point is different: the bear case is no longer far below the quote, and the normalized case is still materially above it.
What I'd Do, in Plain Language
Buy a starter now. Keep capital available to buy more if the price falls another fifteen percent. Don't pretend you know which quarter the margin troughs. Don't pretend you know whether O'Neill is the answer.
Decide, in advance, what would prove you wrong.
Gross margin breaks fifty-three percent on a trailing basis. That would suggest the markdown habit has gone structural.
Americas same-store comps decline more than five percent for two quarters in a row. That would suggest the brand problem isn't a product-cycle problem.
Net debt appears on the balance sheet to defend the buyback. That would suggest management has confused returning capital with destroying it.
The new CEO leaves inside eighteen months. That would tell you the institutional patience is shorter than the turnaround requires.
Any of those and the thesis is broken. None of those and you sit on your hands and let the business compound.
A Closing Thought, with No Question Mark
The hardest thing in investing is doing the right thing when the right thing looks dumb. A 24% ROIC business at ten times earnings looks dumb to buy because everyone is talking about how dumb it would be to buy.
The price is the price. The numbers are the numbers. The crowd is welcome to its conviction.
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Disclaimer
tripledub is an employee of Simply Wall St, but has written this narrative in their capacity as an individual investor. tripledub has a position in NasdaqGS:LULU.. Simply Wall St has no position in any companies mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimate's are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
