MW Lululemon stock falls as Trump's tariffs put it in the 'bullseye.' This analyst still says buy.

By James Rogers

Since the yoga-wear maker makes most of its products in countries targeted with outsize tariffs, William Blair says the tariff rate on its products is roughly 39%

Lululemon Athletica Inc. shares took a dive Thursday, as the sweeping global tariffs announced by President Trump on Wednesday appeared to target places that hurt the yoga-wear maker the most.

The company appeared to be "in the tariff bullseye," William Blair analyst Sharon Zackfia wrote in a note to clients, because the bulk of Lululemon's products are sourced from countries that are set to be targeted with outsize tariffs.

If Lululemon were to fully pass on the cost of tariffs to American consumers, Zackfia estimates it would result in "across-the-board" price increases of 11% to 12%. But she doesn't think that's likely.

The stock $(LULU)$ tumbled more than 10% in midday trading, which put it on track to close at the lowest price since Sept. 10. The selloff comes less than a week after Lululemon shares plunged 14.2% in the wake of a disappointing earnings outlook that cited a lack of brand awareness.

The company had said in its earnings call with analysts that its outlook already included the expected impact of the Trump administration's previously announced tariffs on imports from China and Mexico.

Lululemon Chief Financial Officer Meghan Frank said then that the company will be "keeping a close eye" on the possibility that a broader set of geographies would be targeted with new tariffs. That became reality less than a week later.

In particular, the company said 40% of its products were manufactured in Vietnam, which was slapped with a 46% tariff by the U.S. Elsewhere in Southeast Asia, another 46% of its products are made in Cambodia, Sri Lanka, Indonesia and Bangladesh, which were hit with tariffs ranging from 37% to 49%.

William Blair's Zackfia estimates that the blended tariff rate for Lululemon's products is roughly 39%. And the estimated impact on profitability would be to lower gross margins - sales minus the cost of sales - by 720 basis points (7.2 percentage points).

The analyst believes that, rather than across-the-board price increases to mitigate the profit impact, Lululemon will take a more "surgical" approach. Zackfia noted that during the supply-chain crisis of 2021 and 2022, when shipping rates soared after the pandemic, Lululemon grabbed market share as it wasn't as aggressive as its competitors with price hikes.

While Zackfia believes it will take investors some time to fully digest the tariffs, she believes the stock's selloff has already priced in nearly half of the impact on profit.

That's why she maintained her outperform rating on the stock, citing a "compelling" price and the fact that it sells to a more affluent customer base.

And with other tariff-mitigation tactics still available, such as negotiations with vendors and cost cutting, Zackfia believes Lululemon's margins are strong enough to fully absorb the tariffs.

The stock has plunged nearly 34% year to date, while the Consumer Discretionary Select Sector SPDR ETF XLY, of which the stock is a component, has declined around 14%. The S&P 500 index SPX has lost more than 7% this year.

-James Rogers

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April 03, 2025 13:32 ET (17:32 GMT)

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