Down 20%, Is Lululemon a Buy?

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Lululemon (NASDAQ: LULU) shares dropped roughly 20% in value last week after the company delivered an earnings report that included less enthusiastic earnings expectations for the year. While its revenues are still expected to be relatively in line with previous guidance, the added costs that tariffs will impose led management to dial back earnings estimates, causing the market to hit the stock pretty hard.

To be fair, Lululemon has historically been a fairly expensive stock, and companies need to produce solid results if they want to sustain higher valuations.

Lower guidance

Arguably the biggest factor impacting Lululemon shares right now is the guidance cut. Yes, the apparel retailer beat estimates for the first quarter, but management nonetheless reduced earnings per share (EPS) expectations for the year to a range of $14.58 to $14.78 compared to previous guidance of $14.95 to $15.15.

As with most things these days, the weaker outlook is largely due to President Donald Trump's tariffs. Clothing companies like Lululemon largely hire overseas subcontractors to do the manufacturing of their clothes, which puts them in the crosshairs of Trump's policies. When I wrote about Lululemon in April, I noted that the tariffs Trump was imposing on Vietnam would impact 40% of Lululemon's production. Though those new taxes are currently paused, the president set the tariff rate on imports from that country at 46%.

Image Source: Getty Images

Despite a 7% increase in revenue, Lululemon's earnings fell year over year in its fiscal 2025 first quarter. For the period, which ended May 4, net income was $314 million compared to $321 million a year earlier; a lower overall share count was responsible for its EPS growth. According to CNBC, comp sales increased a mere 1% compared to Wall Street's expectations for a 3% increase.

From what I can see, Lululemon has two main problems. Its costs of production will rise due to tariffs while the premium prices it charges for its goods could be putting a damper on its sales, especially in the United States, where recent Commerce Department reports have shown weak consumer spending growth.

Valuation

One positive that can be pointed out for the stock is its now-lower valuation. According to fullratio.com, Lululemon has historically averaged a P/E ratio of around 42. After the stock's latest pullback, investors can pick up shares for a mere 17 times earnings. Based on the low end of the company's new guidance for 2025, the stock is trading at roughly 18 times forward earnings. But are these valuations low enough to make the stock a buy?

Previously, my stance was that the market conditions Lululemon faces make it a stock to avoid for the time being. That's still my view. CFO Meghan Frank said that the company plans to make some "strategic" price increases on certain items to pass their tariff costs along to their customers. However, I don't see how the company can keep raising prices on what are already $100 leggings. Granted, Lululemon has really branched out into different categories, even offering golf-oriented apparel, but I still think that any price increases will be a problem at a time when U.S. consumers are tightening their belts. The combination of high tariffs and reduced consumer discretionary spending is going to pressure apparel brands like Lululemon and Nike (NYSE: NKE). Until those headwinds abate, there isn't going to be much momentum here.

As a final note, I would also add that Lululemon operates in a highly competitive area of the apparel industry. It's constantly vying for market share and consumer attention with the likes of Nike, Gap (NYSE: GAP), and others. In the end, prices do matter in that fight.

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