Is Lululemon's Valuation Justified?

Key Points

• Lululemon shares trade at a forward price-to-earnings ratio substantially below the market.

• Management has cut earnings guidance for fiscal 2025 as tariffs negatively impact the business.

• However, the athleisure clothing maker has a premium brand that supports continued, strong profits.

• 10 stocks we like better than Lululemon Athletica Inc. ›

It has been a terrible year for Lululemon Athletica (NASDAQ: LULU) investors. Shares in the athleisure pioneer are down 54% in 2025 (as of Sept. 26). Investors clearly haven't been pleased, as the business has reported disappointing financial results that's forcing the market to lose confidence.

This apparel stock is trading on the discount rack these days. Its forward price-to-earnings (P/E) ratio of 13.4 is incredibly cheap. It represents a massive discount to the 21.8 multiple of the S&P 500.

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Is Lululemon's low valuation justified? Investors who think through this question can figure out if the stock is worthy of investment consideration.

Image source: Getty Images.

Disappointing trends

Lululemon shares tanked after the business reported financial results for Q1 and Q2 of this fiscal year. It was worrying to see same-stores sales increase by only 1% in each of those quarters. However, the market was probably most disappointed with management cutting guidance both times, as they called out the macro headwinds stemming from the changing tariff situation. It hasn't helped that consumer confidence has taken a hit this year, which can hurt spending behavior.

When Lululemon reported fiscal 2024 financial results in late March, the leadership team expected revenue growth of 7.5% for fiscal 2025. By September, the top-line projection was 5%, while diluted earnings per share are now expected to drop 14.5% (at the midpoint).

Of course, what's been going on with U.S. trade policy is completely out of the company's control, so it shouldn't necessarily be blamed for that. Lululemon executives are strategically raising prices and finding efficiencies in the supply chain to handle the situation.

Competition is fierce in the athletic apparel industry. Lululemon might have been a trailblazer, introducing the athleisure trend to the masses. However, there are other companies trying to capture wallet share from consumers, like Alo Yoga, Vuori, and Gap's Athleta.

Lululemon hasn't been on top of its game when it comes to product innovation, which has opened the door to rivals stealing market share. CEO Calvin McDonald said that launching fresh merchandise is a priority.

Reasons to be optimistic

Lululemon is going through a tough period. But it's not difficult for investors to still be optimistic. Brand presence is one reason why. Lululemon is without a doubt a premium player in the industry. In the past five years, its gross margin has averaged a superb 57.5%, showcasing proven pricing power. Finding lasting success in fashion isn't easy, but Lululemon deserves the benefit of the doubt.

The company is extremely profitable. Lululemon reported $1.8 billion in net income in 2024. This supports ongoing free cash flow generation that allows management to repurchase shares. The outstanding share count was reduced by 4% in the past 12 months.

Consumers might generally be worried about the state of the economy. Consequently, it makes sense that they should be discerning with their spending choices. But the positive spin on this entire situation is that the global economy spends the vast majority of its time in expansion mode than in a recessionary or weak period. This should bode well for Lululemon as we look out over the next several years.

The business also has a meaningful growth opportunity in China, which represented 16% of company sales in Q2 2025. With plans to aggressively open stores there, the leadership team is betting on a massive middle class.

Follow the business closely

The stock trades at a bargain-level valuation, as investors can buy the business at a forward P/E ratio of just 13.4. In my view, this dirt cheap multiple probably isn't justified, given the positive attributes that Lululemon possesses. Despite its struggles, this remains a quality business.

However, investors might want to wait for fundamental improvements before buying shares. It might take some time for the financials to take a turn for the better, at which point there will be reduced risk.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. The Motley Fool has a disclosure policy.