Lululemon athletica (LULU -19.71%) might not have the profile of a traditional market-crushing stock, but it's been one of the best-performing consumer-facing stocks of the last 20 years.

More than any other company, Lululemon is responsible for making athleisure a massive apparel category, and it's made it one of the most valuable apparel companies in the world.

Going back to its 2006 IPO, the stock is up roughly 1,800%, and even over the last decade, the stock has gained more than 300% as it's continued to deliver strong growth.

However, more recently the stock has struggled. After peaking in late 2023, shares have fallen on concerns about its valuation, slowing growth, and now the trade war and the broader threat to the global economy. The stock is now down 48% from its peak.

Lululemon tumbled in its first-quarter earnings report as comparable sales growth slowed to just 1% with comps down 2% in the Americas. Revenue in the quarter rose 7% to $2.37 billion as the company continues to open new stores, which matched estimates.

Further down the income statement, gross margin improved from 57.7% to 58.3%, but operating income rose just 1% to $438.6 million as operating margin fell 110 basis points to 18.5% due to an increase in selling, general, and administrative expenses.

On the bottom line, earnings per share increased from $2.54 to $2.60, which edged out the consensus of $2.59.

A person doing yoga on the beach.

Image source: Getty Images.

What's ailing Lululemon

What really pressured the stock was the company's guidance, due in part to the impact of tariffs as management said price hikes to absorb tariffs would be targeted and limited.

For the full year, Lululemon maintained revenue guidance of $11.15 billion to $11.3 billion, or 6% revenue growth at the midpoint. However, it cut its full-year earnings-per-share guidance from $14.95-$15.15 to $14.58-$14.78.

Second-quarter guidance also missed the mark.

Lululemon's decision to maintain revenue guidance with a growth rate that's steady from the first quarter shows that it doesn't anticipate a significant impact on demand. Rather, the challenges the company is facing are on the cost side, primarily due to tariffs.

The company now expects operating margin to fall 160 basis points, weighing on earnings per share.

The China opportunity

While Lululemon's growth has slowed in its core North American market, the company continues to see a long runway in China, which represents its biggest market for new store growth.

In the first quarter, revenue in China increased 21% on 7% comparable sales growth, and China made up 13% of total revenue last year.

Like other American consumer brands that have done well in China like Apple, Starbucks, and Nike, Lululemon seems to be benefiting from the same upscale brand reputation that those companies have as well as a culture of conspicuous consumption. Additionally, Lululemon has managed to deliver solid growth in China even as the consumer economy has been weak there.

The retailer currently has 154 stores in China, 20% of its total, and it had an initial goal of opening 200 stores, though it now expects to top that. CFO Meghan Frank said, "We still feel we're early in our journey" in China on the earnings call.

Is Lululemon a buy?

Lululemon's challenges with tariffs seem to be similar to what we've heard from other retailers in apparel and related sectors, so it shouldn't be a cause for alarm from investors. Meanwhile, the tariff situation is fluid enough that rates could easily change, and it's unclear if the tariffs will still be relevant a few years from now.

After cutting its guidance for the year and Friday's sell-off, Lululemon now trades at a forward P/E of 18. For a company with its brand strength, historical growth rate, and a runway to expand in China, that looks like a great price.

While investors may have to be patient as the trade war plays out, at the current price, Lululemon looks like a clear buy.