lululemon Q1 Outlook Reflects Measured Optimism: Buy Before Earnings?

Lululemon (LULU) is expected to report Q1 fiscal 2025 results on June 5, with sales projected to increase 6.6% year-over-year to $2.35 billion and EPS estimated to grow 1.6% to $2.58. Growth is anticipated from international markets, particularly China, and the company's 'Power of Three x2' strategy; however, headwinds from inflation, higher interest rates, and tariffs, along with softness in the Americas, are expected to pressure margins, with the operating margin projected to decline 120 bps year over year.

Analysis

Lululemon Athletica Inc. (LULU) is poised for top and bottom-line growth in its upcoming first-quarter fiscal 2025 results, with consensus estimates projecting a 6.6% year-over-year sales increase to $2.35 billion and a 1.6% rise in earnings per share (EPS) to $2.58. The company has a strong track record, evidenced by an average trailing four-quarter earnings surprise of 6.6%, and a Zacks model with an Earnings ESP of +1.82% and a Zacks Rank #3 (Hold) conclusively predicts another earnings beat. Growth is expected to be driven by international markets, particularly Mainland China where revenues are predicted by an external model to increase 2.3% YoY, and the ongoing execution of its 'Power of Three x2' growth strategy focusing on product innovation, guest experience, and market expansion. However, Lululemon faces significant headwinds, including inflationary pressures and higher interest rates that are softening discretionary spending and affecting its Americas business, notably in the women's category. Tariff uncertainties on imports from Mexico and China are also expected to elevate costs. Consequently, margin pressure is anticipated: Lululemon expects a flat gross margin YoY, a 120 basis point (bps) deleverage in SG&A as a percentage of sales, and a 120 bps YoY decline in the operating margin for Q1. An external model forecasts a 50 bps contraction in adjusted gross margin to 57.2% and an 80 bps decline in adjusted operating margin to 18.8%. The company's Q1 EPS guidance of $2.53-$2.58, which includes a 6-cent negative currency impact, compares to $2.54 in the prior-year quarter. LULU's stock has underperformed recently, declining 8.9% over the past three months, lagging its industry, the Consumer Discretionary sector, and the S&P 500. Trading at a forward 12-month P/E multiple of 20.74X, significantly above the industry average of 12.72X, the stock's valuation suggests high investor expectations but also potential overvaluation, despite its price being 25.1% below its 52-week high. The long-term 'Power of Three ×2' strategy, aiming to double net revenues to $12.5 billion by 2026, underpins a positive secular outlook, focusing on international expansion and growth in men's apparel.

Key Decisions for Investors

• Investors should closely monitor the upcoming Q1 fiscal 2025 earnings report for insights into margin trajectory, particularly the impact of tariffs and SG&A deleverage, and the performance of the Americas segment.
• Given the mixed outlook of near-term margin pressures against potential for an earnings beat and strong long-term growth strategy, current long-term shareholders may consider holding their positions, as cyclical headwinds are expected to be temporary.
• Prospective investors should acknowledge the stock's premium valuation (forward P/E of 20.74X vs. industry 12.72X) and recent share price underperformance, potentially waiting for a more attractive entry point or further evidence of North American recovery before initiating new positions.
• Particular attention should be paid to management's commentary on international growth momentum, especially in China, and any updates to the 'Power of Three x2' strategic initiatives, as these are key drivers for long-term value creation.