Slumping sales, plummeting margins, widening losses -- these are some of the tell-tale signs of a dying apparel business.
So why do investors believe that Lululemon (LULU +2.16%) is a dying apparel business when, in the second quarter of 2025, its sales were up, margins were within their historical ranges, and diluted earnings per share (EPS) were only down a meager 1.5%? That's what this article aims to explore.
Image source: Getty Images.
Why Lululemon stock is down
To be sure, many investors do believe that the best days for Lululemon stock are over. As of this writing, it's battling The Trade Desk for the last place performance in the S&P 500 in 2025 -- not good. And poor stock returns often negatively influence investors' outlook.
Turning from investor sentiment to the business itself, Lululemon is facing headwinds and its expectations for the year are consequently coming down. That's the short story of why its stock is performing so poorly.
NASDAQ: LULU
Key Data Points
The bulk of Lululemon's business is in the United States and Canada and herein lies the headwinds. First, growth in these markets has stalled, partially because of its own success -- growth in these markets has been stellar in recent years making current growth look weak by comparison. Second, it manufactures its apparel overseas (mostly in Vietnam) and import tariffs are expected to deal a $240 million blow to gross profit in 2025 alone. The impact could be even higher next year.
To be sure, Lululemon's sales projections for 2025 aren't as good as previously hoped. To begin the year, management thought it would generate about $11.2 billion in full-year revenue. After Q2, it believes it will generate $11 billion in revenue, at most. So that is one factor here, yes.
However, the bigger concern for Lululemon is profitability because of the tariff impact. Management's original full-year EPS guidance was $14.95 to $15.15. Now the company's EPS guidance range is $12.77 to $12.97 -- a 14% reduction from the previous midpoint to the current midpoint.
Is Lululemon down and out?
If we zoom out all the way, I believe we see that Lululemon is a beloved brand with moderating growth and still strong profitability. Let's consider each in turn.
Regarding a beloved brand, Lululemon has a net promotor score (NPS) of 42, according to Comparably. With the NPS, a neutral score is zero, whereas 100 is the highest. So its score of 42 indicates that the brand has fans. It's not a perfect tool. But Lululemon's NPS hasn't changed in at least a year. So it's not as if love for the brand is suddenly plummeting.
Regarding moderating growth, Lululemon's Q2 revenue in the Americas was only up 1%. More encouragingly, the company's international revenue was up a strong 22%. But revenue from the Americas is much larger than international revenue, resulting in only 7% growth overall. It's still growing but growth has rarely been this slow during the last decade.
Regarding still strong profitability, Lululemon still has an operating margin of around 20%, which is quite good for an apparel business even if it's taking a small step back.
Given its beloved brand and still strong profits, I believe Lululemon's moderating growth rate isn't something that breaks the investment thesis here. But it may reset some expectations. After all, a low-growth company isn't worth quite what a high-growth company is worth, all else being equal.
As of this writing, Lululemon stock trades at roughly 13 times this year's earnings. That's about 40% lower than the average stock in the S&P 500, according to Yardeni Research. That's a nice discount.
A cheaper valuation isn't the end of the world, either. In Q2, Lululemon repurchased 1.1 million shares at cheaper-than-usual prices. That's something that management can keep doing, driving down the share count and boosting shareholder value.
Here's a worst-case scenario for Lululemon shareholders: The moderating growth is an early warning sign that its brand is losing market share to newer players and its profits are in the early stages of long-term, permanent declines. In this scenario, Lululemon stock will likely be a bad investment regardless of its valuation.
In my opinion, the more likely scenario is that Lululemon's growth is taking a breather after several years of strong results and will pick back up again later, particularly as international revenue contributes more to its overall revenue. And its profits are taking a temporary hit due to the uncommon uncertainty that tariffs bring to the table.
In this second scenario, patient Lululemon investors will likely still do well. For now, it will putz along earning profits and buying back shares. And eventually, growth will pick back up and margins will bounce back. This is the scenario I find more likely and it's why I say that Lululemon stock is down but not out.
