Lululemon Earnings: Tough Year Ends on Positive Note; CEO Search Continues

Key Morningstar Metrics for Lululemon Athletica

• Fair Value Estimate

  : $295.00

• Morningstar Rating

  : ★★★★★

• Morningstar Economic Moat Rating

  : Narrow

• Morningstar Uncertainty Rating

  : High

What We Thought of Lululemon Athletica’s Earnings

Lululemon Athletica’s LULU fourth-quarter comparable sales declined 1% in the Americas (74% of sales) but rose 16% internationally. The firm’s operating margin fell by more than 6.0 percentage points to 22.3% as gross margin plummeted 5.5 percentage points to 54.9% on higher tariffs and markdowns.

Why it matters: Lululemon is at a critical juncture after subpar results from competition, tariffs, and product issues led Calvin McDonald to resign as CEO. With the search for his replacement ongoing, management is investing to maintain the company’s leadership in women’s athleisure.

• The firm is making progress by clearing out older merchandise and pursuing more marketing and innovation that focus on technical apparel. We think this focus will appeal to core customers and make the brand more competitive.
• China Mainland sales grew 24% versus our 13% forecast as consumers responded favorably to market-specific products and marketing events. Recent performance supports our view that Lululemon can generate double-digit percentage sales growth in the region over the long term.

The bottom line: Narrow-moat Lululemon’s shares are very undervalued relative to our $295 fair value estimate, which we do not expect to change materially. We think investors overlook the firm’s opportunities for sales and margin expansion as it builds its international store base and releases new products.

• In 10 years, we project half of Lululemon’s annual sales will come from outside North America. Meanwhile, the firm is reforming its product development and supply chain to reduce lead times from 18 months or more to about one year, to reduce clearance sales and boost margins.
• Lululemon’s 2026 outlook for a 1.0%-3.0% sales decline in the Americas is shy of our 0.5% growth estimate, but sales should improve as the year progresses, given marketing and product release plans. We forecast that Americas sales growth will return to the mid-single digits in 2028.