The 'Big Short's' Michael Burry Has Seen His Largest Position Fall Over 50% This Year. Should Investors Sell the Stock?

Lululemon cut full-year net revenue guidance to $10.35B–$10.5B (vs. prior $11.0B–$11.15B), implying a 5%–7% decline, despite Q2 adjusted EPS of $2.06 beating expectations. Revenue of $2.42B slightly missed and comparable sales fell 9% YoY, with management citing negative commentary and a larger-than-anticipated sales drop in key categories. The updated outlook includes tariff refunds, but gross margin still rose only to 60.5% (or 54.9% ex-tariff refunds). Shares fell nearly 18% after results and analysts reaction was sharply negative, with BNP Paribas cutting its price target by 50% to $44.

Analysis

This is less a one-quarter earnings miss than a signal that the market is re-rating LULU from premium growth compounder to contested brand. In apparel, once repeat purchase behavior slips, the downside is nonlinear: weaker full-price sell-through forces either lower ASPs or heavier markdowns, which can compress the multiple before the income statement fully catches up. That dynamic is why adjacent winners are likely not another premium legging brand, but trade-down beneficiaries such as TGT, TJX/ROST, and private-label athletic assortments that can absorb displaced demand.

Near term, the key issue is that the reported margin cushion is not fully organic, so consensus earnings power may still be too high even after the guidance reset. Over the next 1-3 months, the catalyst path is channel checks: if holiday assortment and traffic do not show stabilization, another round of estimate cuts is likely, and the stock can de-rate another 15-25% even without a broader consumer downturn. The biggest falsifier is a quick improvement in North America comps and a visible reduction in promo intensity; that would argue the brand issue is temporary rather than structural.

The contrarian view is that the market may be over-anchoring on macro when this is mostly execution damage. If the new CEO resets product cadence and consumers are still spending, a sharp short squeeze is plausible because expectations are already low and the stock now trades on depressed growth assumptions. But the burden of proof is on clean comp stabilization, not just valuation, and the 6-18 month risk is that stale product perception becomes terminal-share-loss rather than a cyclical dip.

Key Decisions for Investors

• Short LULU on any post-earnings bounce back toward the $105-$110 area; target a move into the mid-$80s over 1-3 months if comps stay negative. Cover if the next update shows sequential comp improvement and less reliance on promotional activity.
• Buy a 3-6 month LULU put spread instead of outright short equity to express multiple-compression risk with defined downside; best use if implied volatility stays elevated but below historical panic levels.
• Pair trade: long TGT / short LULU for 1-3 months to express trade-down behavior if premium athletic demand continues to leak to mass retail and off-price channels. The pair works best if consumer spending holds but brand differentiation worsens.
• Avoid bottom-fishing until the next quarter validates the new product cycle; if comparable sales remain materially negative, assume the stock is still in a de-rating phase rather than a value setup.
• Set a watch item on holiday sell-through and gross margin ex one-time items; a rebound only becomes investable if margin holds while comps flatten, otherwise this remains a structural short, not a tactical one.