lululemon athletica inc. LULU stock has shown a dismal performance in the past month, recording a decline of 4.2%. Most of this decline resulted from the company’s commentary regarding expectations for higher expenses and ongoing uncertainty due to the impacts of increased tariffs on imports from China and Mexico on its fourth-quarter fiscal 2024 earnings call last month. The company’s commentary made investors skeptical about its performance in the near term.

The stock’s dismal performance in the past month pushed it below the broader sector’s growth of 0.2% and the S&P 500 index’s decline of 1.2%. However, the LULU stock has outperformed the Textile - Apparel industry’s 5.6% decline.

LULU’s performance is notably stronger than its competitors NIKE Inc. NKE, Under Armour UAA and G-III Apparel Group GIII, which have lost 9.4%, 7.1% and 8.9%, respectively, in the past month.

LULU’s One-Month Price Performance

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At the current share price of $271.27, LULU reflects a 20% premium to its 52-week low of $226.01. Meanwhile, the lululemon stock’s price reflects a 35.9% discount from its 52-week high of $423.32. LULU trades below its 50 and 200-day moving averages, indicating a bearish sentiment.

LULU Stock Trades Below 50-Day & 200-Day Moving Averages

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lululemon’s Premium Valuation

Additionally, LULU’s current forward 12-month price-to-earnings (P/E) multiple of 17.88X raises concerns about whether the stock's valuation is justified. This multiple is significantly higher than the Zacks Textile - Apparel industry average of 10.44X, making the stock appear relatively expensive.

The price-to-sales (P/S) ratio of lululemon is 2.86X, above the industry’s 1.63X. This adds to investor unease, especially considering its Value Score of C, which suggests it may not be a strong value proposition at current levels.
 
At 17.88X P/E, lululemon trades at a significant premium to its industry peers. The company’s peers, such as Under Armour and G-III Apparel, are delivering solid growth and trade at more reasonable multiples. Under Armour and G-III Apparel have respective forward 12-month P/E ratios of 15.11X and 5.91X — all significantly lower than LULU. At such levels, lululemon’s valuation seems out of step with its growth trajectory. However, lululemon’s P/E ratio reflects a discount to its key peer, NIKE, which trades at 29.31X.

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The LULU stock’s premium valuation suggests that investors have strong expectations for its growth. However, the stock currently seems somewhat overvalued. lululemon’s ability to meet or exceed these lofty expectations is crucial to justifying its premium pricing.

The company’s success in its Power of Three X2 growth plan, which promises a total net revenue CAGR of 15% for 2021-2026, is crucial. Strong business momentum in its international markets, an expanded men’s category and accelerated e-commerce investments should fetch the company laurels. While success in these areas could strengthen its market leadership, failure could pose serious challenges for this yoga apparel retailer.

What Keeps Investors Skeptical About LULU?

While lululemon delivered a strong performance last quarter, investor sentiment remains cautious due to rising tariffs on imports from Mexico and China, along with unfavorable currency exchange rates. These concerns are reflected in the company’s subdued outlook for fiscal 2025.

For the first quarter of fiscal 2025, lululemon anticipates a flat year-over-year gross margin year over year. A slight improvement in product margin is expected to be offset by fixed cost deleverage. Markdown levels are projected to remain consistent with the same period last year.

Selling, general and administrative (SG&A) expenses are expected to deleverage by 120 basis points as a percentage of sales due to increased foundational investments, depreciation and brand-building initiatives. Consequently, the operating margin is projected to decline by 120 basis points. Fiscal first-quarter EPS is expected to between $2.53 and $2.58 compared with $2.54 in the prior-year period, including a 6-cent drag from currency fluctuations.

For fiscal 2025, lululemon forecasts a 60-basis-point decline in the gross margin, pressured by fixed cost deleverage, foreign exchange headwinds and increased tariffs. Markdown levels are anticipated to stay in line with fiscal 2024.

SG&A as a percentage of revenues is expected to rise 40-50 basis points, driven by continued investment in the Power of Three x2 strategy and currency headwinds. The company plans to invest in marketing, international expansion and digital capabilities throughout the year.

The operating margin for fiscal 2025 is expected to contract by 100 basis points year over year. Despite these pressures, lululemon remains focused on executing its strategic roadmap, balancing cost discipline with growth investments. It also faces added expenses from reinstated store labor hours, travel and incentive compensation. The company projects fiscal 2025 EPS between $14.95 and $15.15, suggesting a rise from the $14.64 reported in fiscal 2024, though currency headwinds are expected to reduce EPS by 30-35 cents.

LULU's Estimate Revision Trend

Driven by the subdued outlook, lululemon’s estimates have shown a downtrend in the past 30 days. The Zacks Consensus Estimate for LULU’s fiscal 2025 and 2026 earnings per share declined 2% and 1.6%, respectively, in the last 30 days. The downward revision in earnings estimates indicates that analysts are skeptical about the company’s near-term growth potential. (See the Zacks Earnings Calendar to stay ahead of market-making news.)

For fiscal 2025, the Zacks Consensus Estimate for LULU’s sales and EPS implies 5.7% and 1.8% year-over-year growth, respectively. The consensus mark for fiscal 2026 sales and earnings indicates 8.3% and 10.1% year-over-year growth, respectively.

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Analyzing LULU’s Core Strengths & Long-Term Growth Potential

Despite near-term challenges, lululemon continues to demonstrate compelling long-term growth potential, particularly through its expanding international presence. The brand is gaining strong traction in key global markets, such as Mainland China, and the broader EMEA and APAC regions, supported by its innovative product offerings and omni-channel approach.

lululemon’s alignment with initiatives like Healthy China 2030, alongside its differentiated “made-to-field” positioning, is helping it resonate with a growing global customer base. The company anticipates continued momentum in these markets through fiscal 2025 and aims for international revenues to eventually account for nearly 50% of total sales, quadrupling from the 2021 reported level by the end of 2026.

At the core of Lululemon’s strategic roadmap is its ambitious Power of Three X2 growth plan, which targets $12.5 billion in net revenues by 2026, double the 2021 reported figure. This strategy focuses on product innovation, enhancing guest experiences and global market expansion, including growth in menswear and digital channels.

The plan forecasts a 15% compound annual growth rate in total revenues from 2021 to 2026, driven by mid-teens store channel growth and low-double-digit gains in women’s and North American segments. lululemon is also investing heavily in e-commerce capabilities, enhancing mobile functionality, optimizing fulfillment and expanding services like same-day delivery and BOPUS, to meet rising online demand and provide a seamless, elevated shopping experience across channels.

Investment Rationale for LULU

lululemon’s recent share price decline, combined with its premium valuation and persistent tariff and currency pressures, has sparked investor concerns. However, the company’s strong long-term prospects remain intact, fueled by robust growth in international markets, solid performance in Canada and continued momentum in the men’s category. Its seemingly overvalued position is largely a reflection of investor confidence in lululemon’s long-term growth strategy, anchored by the Power of Three X2 plan, strong financials and effective operational execution.

In the current environment, holding on to the lululemon stock appears to be a sensible choice. While the near-term landscape presents headwinds, the company’s ability to manage these challenges will be key to sustaining investor confidence. Long-term investors may still find LULU appealing, though new entrants should carefully assess its valuation. For existing shareholders, retaining this Zacks Rank #3 (Hold) stock in their portfolios remains a prudent move. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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