Why Lululemon's Battle With Costco Could Make or Break Its Stock

Key Points

• Lululemon is suing Costco to stop the sale of knockoff items.

• This lawsuit could indicate erosion in Lululemon's brand power.

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

This is how it happens. You see a product you want, but you don't want to spend the money to buy the real thing, so you find an imitation version somewhere else. Typically, it's not the same quality, but the trade-off is worth it.

This dynamic has been at play with athleisure brand Lululemon (NASDAQ: LULU) and Costco (NASDAQ: COST), but a new lawsuit could ultimately put an end to price-conscious Costco shoppers getting deals on Lululemon knockoffs.

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Time will tell how this lawsuit will play out, but considering Lululemon's struggles lately, the impact of a potential ruling could have an outsized effect on the business.

Let's take a closer look to see what's at stake.

Image source: Getty Images.

Putting an end to dupes

According to Lululemon, Costco has been unlawfully selling dupes (short for duplicates) and knockoffs of several of its designs and patents. These kinds of copycat products are common for Lululemon's products, driving social media engagement using hashtags like #LululemonDupes as influencers and other users promote and share where to find these items.

It's not always easy to know where the line is between actual copyright or patent infringement and simply a similar product, and that's what this lawsuit will need to straighten out. However, it's worth noting that Lululemon contacted Costco in the past and Costco subsequently removed some products from its stores.

That doesn't necessarily have an impact on this lawsuit, but it does show that Costco was treading close enough to a line that it didn't want to cross, and it made a change to avoid further trouble.

Protecting Lululemon's brand

Lululemon's efforts to protect its brand and designs make sense. After all, there's nothing necessarily difficult about making athleisure clothing. What has made Lululemon a successful company over many years is its premium brand that consumers have been willing to pay a premium price for.

However, recent results might make investors wonder if the brand has lost some of its appeal. In the most recently reported quarter, Q2 of fiscal 2025, revenue growth was only 6.5%, continuing a trend of slowing growth that started a few years ago.

LULU Revenue (Quarterly YoY Growth) data by YCharts

Revenue growth wasn't the only metric to slow down. Q2 2025 saw comparable store sales increase by 1% after growing by 2%, 11%, and 23% in the previous three years' second quarters.

Bigger implications

For investors, the result of this lawsuit may not be as important as the conditions that led to it being filed in the first place. Lululemon's litigation suggests that its products are easily duplicated and that consumers find these cheaper alternatives acceptable. That's a red flag for the longevity of Lululemon's brand advantage.

A ruling in its favor may stop some of the bleeding, but if Costco knockoffs are that appealing, it suggests Lululemon has much more work to do to justify its premium price in the eyes of its customers.

Where the stock goes in the meantime is anyone's guess, and one would imagine some kind of market movement based on the result of the lawsuit. However, if revenue growth continues to slow, investors are likely to continue to head for the exits.

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Jeff Santoro has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale and Lululemon Athletica Inc. The Motley Fool has a disclosure policy.