Lululemon Athletica

Lululemon's second-quarter sales fell 4% on an 8% decline in the Americas (67% of sales) and a 4% international increase (33%). Including a 560-basis-point benefit from tariff refunds, operating margin fell 190 basis points to 18.8% on sales weakness and higher marketing spending.

Why it matters: Lululemon's sales trends have worsened in all regions as it awaits Heidi O'Neill's official start as CEO on Sept. 8. To return to leadership in categories like leggings (sales fell 20%), O'Neill must improve product development and marketing effectiveness. Lululemon's international business posted a 3% same-store sales decline, far below expectations and typical double-digit growth levels. Issues included a controversy in China and economic weakness in Europe. Even so, we think these markets are underpenetrated and high-potential. Despite the sales miss, operating margin (excluding the refund) was 160 basis points above our 11.6% estimate. Lululemon is cutting costs and limiting discounts to protect margins, which we think is prudent given slow sales and, in the long run, beneficial to brand health.

The bottom line: We expect to cut our $280 fair value estimate on Lululemon's shares by a high-single-digit percentage given a poor near-term outlook. Shares plummeted 18% on Sept. 3 after market close and, in our view, reflect extreme pessimism about Lululemon's prospects. We think Lululemon retains its brand value, the source of our narrow-moat rating, and can return to sales growth and operating margins of 20% or better through product releases and global expansion. That said, weak trends will continue for at least the rest of the year; for the second half, guidance implies a high-single-digit rate sales decline, well short of the estimate for a 1%-2% fall.

Key stats: Lululemon exited the quarter with $1.4 billion in cash after $330 million in share repurchases. We think buybacks create value for investors and maintain our Exemplary Capital Allocation Rating.

Looking ahead, we anticipate O'Neill will make changes in Lululemon's management structure as its product design and marketing processes have been out of sync and less effective than in the past. Specifically, we think Lululemon needs to win back core customers from rivals like Skims and Alo Yoga with new and relevant merchandise. While at wide-moat Nike, O'Neill was heavily involved in product development in the women's athleisure space, so she has a lot of relevant experience. O'Neill will also need to make decisions about Lululemon's commitment to smaller categories. One of these is footwear, which has potential but has seemingly failed to catch on in an extremely crowded field.

We have reduced our fair value estimate to $255 per share from $280 to reflect unfavorable near-term trends.

Lululemon's second-quarter sales fell 4%, with an 8% decline in the Americas and a 4% international increase. Including a 560-basis-point benefit from tariff refunds, operating margin fell 190 basis points to 18.8% on sales weakness and higher marketing spending. Despite weak sales, operating margin (excluding the refunds) was 160 basis points above our 11.6% estimate.

Lululemon’s results were overshadowed by weakening sales trends. Consequently, for 2026, we forecast a 6% sales decline (revised from an expectation of flat), $2 billion in EBITDA (19.2% margin, down from 20.7%), and $9.66 in earnings per share (from $11.14). For 2027, we forecast 1% sales growth, $2.1 billion in EBITDA (19.7% margin), and $10.56 in EPS. Based on this forecast, our fair value estimate implies price/earnings of 24 and enterprise value/EBITDA of 12.

Over the next decade, we forecast Lululemon’s compound average annual sales growth at 3%. This is a typical rate for an international apparel company, but it is below historical levels. In the Americas, we forecast compound average annual sales growth of 2% over the next decade. While Lululemon has achieved higher growth than this in the past, it already has over 475 stores in this region, and competition is high. In its mainland China segment, we forecast 6% compound average annual sales growth from store openings and the growth of the nation’s sportswear market. Finally, we estimate 6% compound average annual sales growth in the rest of the world, with most of the store openings in Western Europe and parts of Asia.

We forecast segment-level operating margins in the mid-30s in both the Americas and mainland China over the next 10 years. We forecast a 23% operating margin in the rest of the world as Lululemon lacks store density in Western Europe and Asia and the brand’s awareness is lower than in North America.

Despite near-term pressure due to tariffs and product discounts, we believe Lululemon can achieve impressive gross margins of around 59% in the long run due to premium pricing and lower costs. The company has made improvements in its supply chain, and we think it can achieve cost efficiencies as its men’s and international businesses grow. We also forecast that Lululemon’s annual operating margins over the next 10 years will be in the low 20s, on par with 2021-24 levels.

Our Narrow Morningstar Economic Moat Rating for Lululemon is based on an intangible brand asset.

Lululemon is often credited as the creator of the athleisure apparel trend and has grown rapidly in North America and other regions. In 2025, the firm had a 6.3% share of the $112 billion North American sports apparel market, second only to wide-moat Nike, per Euromonitor. Indicative of Lululemon’s superior growth as compared with many peers, its share of this market was less than 3% as recently as 2017. Further, just about 10 years after opening its first stores in Europe and Asia, it recorded more than $3.2 billion in sales outside of North America in 2025.

Providing support for our rating, Lululemon’s adjusted returns on invested capital, including goodwill, have averaged 38% over the past 10 years, far above our 9% estimated weighted average cost of capital. At an annual average of 26%, we forecast its adjusted ROICs, including goodwill, will exceed its WACC over the next 10 years as well.

Founded in 1998, Lululemon opened its first store in 2000 in Vancouver, British Columbia, and its first US store in 2023. Since then, it has expanded its company-owned store base to more than 800 stores in about two dozen countries and launched e-commerce that generated 44% of its revenue in 2025. Its annual sales grew to more than $11 billion in 2025 from just $41 million in 2004. In 2025, the company achieved sales per square foot of $1,426, certainly among the highest for any apparel retailer.

In addition to quantitative factors, we evaluate sportswear producers like Lululemon using five specific criteria: geographic reach; pricing; sponsorships/visibility; product quality/performance; and control over distribution. We rate Lululemon as high in pricing, product quality/performance, and control over distribution. We rate its geographic reach and sponsorships/visibility as moderate, as it lacks the integration with global sports that some peers do.

We think Lululemon’s significant control over its sales provides an advantage. Unlike many competitors, the firm generates less than 10% of its sales through third-party retailers. Instead, the company mainly sells its merchandise through company-owned, full-price physical stores and e-commerce. The company’s model allows for control over pricing, discounting, expenses, product assortment, and marketing.

The combination of direct selling and premium pricing allows Lululemon to achieve strong pricing and gross margins. Over the past four years, the firm’s gross margins have averaged 57%, well above peers’ 45%-50%, due in part to its superior pricing power.

The quality of Lululemon’s products allows the brand to remain popular and achieve premium prices. The material in its apparel is significantly more expensive than in traditional athletic shirts and pants, partly accounting for its relatively high pricing. Many of its competitors sell apparel with cheaper materials at lower price points. We think Lululemon protects the integrity of its brand by selling only high-quality apparel, and it has continued to grow and improve margins despite the availability of many similar products.

From its origins as a women’s yoga brand, Lululemon has expanded into men’s clothing over the past decade. Menswear accounted for 24% of its 2025 sales. In contrast, some of its main athleisure competitors sell almost exclusively to women. Although male participation in yoga is increasing, most men purchase Lululemon gear for running. While the men’s running category is crowded, we think the high quality of the company’s fabrics, styling, and the popularity of its brand have attracted consumers who are willing to pay premium prices.

As evidence of its brand strength, Lululemon generates strong sales even though it only spends about 5%-6% of its sales on advertising. For comparison, most of its competitors spend 8%-13% of their annual revenue on marketing. Lululemon’s online and TV advertising is limited, and its athletic sponsorships are small. Instead, the firm engages in more personal forms of marketing, such as through its seemingly ubiquitous reusable shopping bags and by offering yoga and fitness classes in its stores. Lululemon also sponsors yoga and fitness instructors (known as ambassadors), who promote the brand.

Lululemon generated 71% of its 2025 sales in the Americas, but its international sales are growing rapidly. In mainland China, the world’s second-largest sportswear market after the US, the firm’s yearly sales increased to $1.75 billion in 2025 from about $430 million in 2021. Moreover, the company’s profitability appears to be as high in China as in North America, as over the past five years, its segment operating margins averaged 36% in the Americas and 37% in mainland China. Although expanding quickly in China, Lululemon has many years of potential growth, as it only had 172 stores in the region at the end of 2025, while some rivals have thousands. Over the next decade, we forecast its sales in mainland China will increase at a compound average annual growth rate of 6%.

There are also growth opportunities in other regions. We forecast 6% compound average annual sales growth for Lululemon outside of the Americas and China through 2035 as it opens stores and builds awareness. The potential for expansion is large, as the company still has 23 or fewer stores in countries like the UK, Germany, South Korea, and Japan. As in its home market, Lululemon achieves high prices for its products in its international stores.

We do not believe Lululemon has any moat sources besides its intangible brand asset. The company lacks an advantage based on efficient scale or cost as its production and distribution systems are like those of most apparel companies and it does not operate any production facilities. Further, there are no switching costs or network effects.

Despite having many rivals, Lululemon’s productivity stands out in the sportswear space. Its sales per square foot were more than $1,400 in 2026, and its gross margins typically exceed 55%.

Lululemon has a big opportunity in mainland China, which accounted for 16% of its 2025 sales, up from 7% in 2022. China is already the second-largest sportswear market in the world.

Lululemon is often credited with the development of athleisure, a major change in how people dress. Athleisure and sportswear are among a small number of growth areas in the generally low-growth apparel industry.

Competition is ubiquitous in all of Lululemon’s key apparel categories. The firm faces challenges from firms like Athleta, Vuori, and Alo Yoga, and Nike is improving its competitiveness through its Skims partnership.

Lululemon’s sales growth in North America has slowed due to competitive threats, negative press, and product quality and availability issues.

As an importer, Lululemon faces higher US tariffs. Moreover, inflation due to tariffs and energy costs could reduce consumer spending on apparel.