Lululemon Earnings: Disappointing Current Trends, but Long-Term View Intact

Key Morningstar Metrics for Lululemon Athletica

• Fair Value Estimate
  : $295.00
• Morningstar Rating
  : ★★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : High

What We Thought of Lululemon Athletica’s Earnings

Lululemon Athletica’s LULU first-quarter sales rose 4% as increases of 30% in mainland China (19% of sales) and 13% in other international (15%) offset a 3% decline in the Americas (66%). Gross operating margin fell 410 basis points to 54.2%, while gross operating margin fell 730 points to 11.2%, on higher tariff and store costs.

Why it matters: Lululemon’s sales met our forecast, but its operating margin was 60 basis points short. More importantly, sales trends weakened as the quarter progressed and remain weak. The firm blamed the slowdown on negative media coverage and disappointing sales of some new products.

• As such, the firm’s guidance for 2026 sales growth was lowered from up 2%-4% to flat to down 1%, while EPS guidance was lowered from $12.10-$12.30 to $10.95-$11.15. Although these are sizable cuts, we think Lululemon continues to operate as a premium brand in an attractive area of apparel.
• Moreover, some of the recent turmoil has subsided, with the amicable resolution of the damaging and costly proxy fight with founder Chip Wilson and the hiring of Heidi O’Neill as CEO. O’Neill brings significant product development experience from her many years at Nike.

The bottom line: Given the near-term outlook, we expect to reduce our $295 fair value estimate on narrow-moat Lululemon’s shares by a mid-single-digit rate. However, we think shares trade at a very low valuation (forward price/earnings of 10) given the firm’s growth prospects, margins, and cash flow.

• In the long run, we forecast annual sales growth rates in the mid-single digits and operating margins around 22% (up from the high teens this year). Areas of opportunity include new stores in China and other regions and expansions into adjacent apparel and footwear categories.

Between the lines: Lululemon’s 2026 EPS guidance could prove to be low. For one, the firm expects to receive a tariff refund, but it did not provide an estimate of how large it could be. For another, its EPS guidance excludes the benefit of share repurchases.