Shares of Lululemon Athletica (LULU 0.34%) fell 12% in September, according to data from S&P Global Market Intelligence, as investors digested the athleisure company's disappointing outlook in its Sept. 4 earnings report amid a tougher backdrop for U.S. apparel.
"While we continued to see positive momentum overall in our international regions in the second quarter, we are disappointed with our U.S. business results and aspects of our product execution," said Lululemon CEO Calvin McDonald in the company's fiscal second-quarter update.
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Weak domestic demand is weighing on the business
Fiscal second-quarter revenue grew about 7% year over year to roughly $2.5 billion, and diluted earnings per share were $3.10 -- down from $3.15 in the year-ago quarter. However, the worst news may have been the company's guidance. Management reduced its full-year targets to revenue of $10.85 billion to $11 billion, and earnings per share of $12.77 to $12.97, signaling slower progress in the core U.S. market. For context, these targets represent just 2% to 4% year-over-year growth in revenue (4% to 6% growth when excluding the 53rd week that benefited last year's results) and a 12% decline in earnings per share (based on the midpoint of the guidance range).
Tariffs weighed further on sentiment toward the stock. Leadership outlined a sizable profit impact from trade-policy changes that will weigh on gross margin and operating margin into 2026.
Additionally, comparable sales in Lululemon's Americas segment softened, while international -- especially China -- remained a bright spot. That helps drive revenue growth, but it raises questions about the company's near-term sales potential, given the weakness it is seeing in the U.S. in particular.
A cheap valuation accompanied by increased uncertainty
With a price-to-earnings multiple of just 12 as of this writing, Lululemon now trades at a far less demanding level than in years past. But uncertainty is higher than ever, as the company faces slowing growth in its largest region and a tariff headwind that compresses profitability.
The bull case hinges on reigniting U.S. demand while sustaining double-digit international growth. But the risk is that the company may need to spend more on product innovation and marketing to achieve this -- potentially weighing on margins.
Of course, there are some things to like. International momentum, for instance, is exceptional. Even in Q2, international revenue soared 22% year over year. Additionally, the balance sheet is solid; the company has $1.2 billion of cash and cash equivalents. But given the choppy waters the company is facing domestically, investors should approach the stock with caution.
