Investor sentiment has shown signs of improvement following President Donald Trump’s temporary reduction of certain tariffs, aiding a gradual rebound in the stock market toward previous record highs. However, not all companies are benefiting from this upward trend.
Lululemon (LULU), previously a darling of Wall Street, has seen its stock plummet 54% from its December 2023 peak. Once celebrated for its growth, the company has struggled to maintain its momentum amid concerns about valuation and declining growth rates. In the first quarter of fiscal 2025, which ended May 4, Lululemon managed to slightly outperform Wall Street expectations with revenues of $2.37 billion and diluted earnings per share of $2.60. However, this minor triumph was overshadowed by worries regarding future performance and the impact of tariffs on its cost structure.
The ongoing tariff situation is particularly crucial for Lululemon, as a significant portion of its products is sourced from Asia, predominantly Vietnam. The company’s leadership has projected a lower fiscal 2025 guidance amid these uncertainties, leading to a 30% drop in stock price since the earnings report. Analysts now anticipate earnings per share in the range of $14.58 to $14.78 for the year, reflecting minimal growth.
Retailers, including Lululemon, face added pressures as tariff increases could further raise costs, forcing the company to hike prices on select items. This potential strategy may not resonate well with cost-conscious consumers, particularly in a challenging economic landscape.
Furthermore, Lululemon’s growth trajectory is exhibiting signs of decline, with year-over-year revenue growth slowing from 42.1% in fiscal 2021 to a mere 10.1% in fiscal 2024, and even lower rates in recent quarters. Notably, the company reported a 2% decline in comparable sales in its key Americas region during the first quarter, reflecting consumers’ cautious purchasing behavior, as highlighted by CEO Calvin McDonald.
On a positive note, Lululemon has experienced a 7% increase in comparable sales in China, hinting at a significant growth opportunity in that market. Despite facing challenges from both established competitors like Nike and Adidas and newer entrants such as Alo Yoga and Vuori, Lululemon’s strong brand identity positions it well for potential long-term success.
While the company trades at a favorable price-to-earnings ratio of 15.8, its lowest in a decade, investors should weigh the near-term uncertainties carefully. If Lululemon can navigate these issues effectively and demonstrate fundamental improvements, there is potential for significant stock recovery by 2028. This situation represents a high-risk, high-reward opportunity in an evolving retail landscape.