lululemon Stock Drops 37% in 3 Months: A Bargain Buy or Time to Sell?

Lululemon (LULU) shares have fallen 37% over the past three months, significantly underperforming the market due to investor concerns over rising import tariffs and weak U.S. traffic, which led to a trimmed FY25 gross margin outlook. The company's premium 13.55x forward P/E, above the industry average, appears unjustified given lowered earnings estimates and anticipated profitability pressures, including a 110 bps gross margin decline for FY25. Analysts have consequently downgraded estimates, reflecting persistent skepticism until U.S. demand rebounds and margin stability is evident, resulting in a Zacks Rank #4 (Sell).

Analysis

Lululemon's stock has demonstrated significant underperformance, declining 37% over the past three months and lagging the Textile - Apparel industry's 15.8% fall. This downturn is primarily driven by a revised fiscal 2025 outlook, which includes a projected gross margin decline of 110 basis points and an operating margin drop of 160 bps, largely due to impending import tariffs of up to 30% on Chinese goods. Fundamental cracks are apparent in its core U.S. market, where comparable sales grew just 1% amid weakening store traffic and cautious consumer behavior. This slowdown is compounded by rising inventory levels, with units up 16% and dollar value up 23%, elevating the risk of future markdowns. Despite the stock's sharp decline, its valuation remains at a premium, with a forward P/E of 13.55x, above the industry average of 11.32x and significantly higher than peers like Guess (10.41x) and Hanesbrands (9.46x). This valuation premium appears disconnected from the company's near-term prospects, which are further clouded by downward analyst estimate revisions for fiscal 2025 and 2026 earnings, signaling sustained skepticism about profitability and growth.

Key Decisions for Investors

• Given the disconnect between a premium valuation and deteriorating fundamentals, including a projected 2% EPS decline for fiscal 2025, investors should exercise caution as the risk/reward profile appears unfavorable.
• Monitor U.S. comparable sales trends and gross margin performance in subsequent quarters, as stabilization in these key areas is critical for any potential thesis reversal.
• Consider the stock's significant underperformance and higher valuation multiple relative to peers like Guess and Hanesbrands, which could inform relative value assessments or pair trading strategies.
• Be aware that the combination of tariff pressures, slowing U.S. demand, and rising inventories suggests a heightened risk of further downward earnings revisions and margin erosion from increased promotional activity.