Lululemon Shares Dropped After the Company Cut Its Annual Forecast. Is the Stock a Buy Amid the Selloff?
Key Points
Lululemon is growing its base in China, but sales in the U.S. continue to decline.
The company has put a proxy fight behind it, but management lowered its full-year guidance.
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A week ago, I predicted that Lululemon Athletica (NASDAQ:LULU) stock would take a beating if the company reported weak earnings or lowered its 2026 guidance. And unfortunately, both of those things happened when the company posted its fiscal 2026 first-quarter report on June 4.
Now the company is trading at an eight-year low, having fallen more than 12% post-earnings. Where does the athleisure company go from here?
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Lululemon’s earnings by the numbers
First, let’s see what happened. For the quarter ending May 3, Lululemon posted revenue of $2.47 billion, up from $2.37 billion a year ago. However, the cost of goods sold jumped 14% year over year, pushing the company’s gross profit down by more than 4%. On top of that, Lululemon’s selling and general expenses rose 12.4%, to $1.05 billion. All that led to the company’s net income falling 38% to $195 million for the quarter. Earnings per share were $1.69, versus $2.60 in the same period a year ago.
While Lululemon is growing in popularity in China, its biggest problem lies in domestic sales, as revenue and comparable sales in the U.S. were down significantly from last year.
| Net Revenue | Change | Foreign Exchange | Change in Constant Dollars |
|---|---|---|---|
| United States | (4%) | -% | (4%) |
| Canada | (3%) | (3%) | (6%) |
| Americas | (3%) | (1%) | (4%) |
| China Mainland | 30% | (7%) | 23% |
| Rest of World | 13% | (4%) | 16% |
| Total International | 22% | (6%) | 16% |
| Total | 4% | (2%) | 2% |
Source: Lululemon
| Comparable Sales | Change | Foreign Exchange | Change in Constant Dollars |
|---|---|---|---|
| Americas | (5%) | (1%) | (6%) |
| China Mainland | 20% | (7%) | 13% |
| Rest of World | 13% | (5%) | 1% |
| Total | 1% | (3%) | (2%) |
Source: Lululemon
Management also cut full-year guidance, now projecting revenue of $11 billion to $11.15 billion, a decline of up to 1% from a year ago. Earnings per share are expected to be in the range of $10.95 to $11.15.
Interim co-CEO Meghan Frank acknowledged “a few headwinds and a moderating sales trend” and placed the blame on poor product launches and “spikes of negative commentary in the media and on social channels with regard to our brand, which had an impact on traffic and overall top-line performance.”
A proxy fight takes a toll on earnings
Frank didn’t mention him by name, but at least part of that negative commentary stemmed from a very public proxy fight with founder Chip Wilson, which was settled just days before the earnings report. Wilson, who left the company in 2013 and continues to hold nearly 9% of the company’s stock, has been an outspoken critic, accusing the company of squandering "billions of dollars in brand power."
Wilson had also criticized Lululemon’s newly hired CEO, former Nike executive Heidi O’Neill. O’Neill won’t start work at Lululemon until Sept. 8, so the company still has several months of interim leadership before O’Neill takes over.
Image source: The Motley Fool.
However, Lululemon won’t have to worry about Wilson being a public distraction. The founder agreed to an 18-month non-disparagement clause as part of its settlement, which also saw Lululemon agree to add two of Wilson’s candidates to the board of directors.
Where does Lululemon go from here?
The company faces significant challenges, as tariffs and higher fuel and other expenses pressure margins. Lululemon has applied for a refund of the tariffs following the Supreme Court’s ruling that they were illegal. But it’s unclear when those refunds will be processed.
Lululemon’s premium line of yoga and training pants, shorts, and tops also leaves little room for the company to reduce prices to boost sales. The company plans to reduce in-store offerings by 15% to better highlight newer products and improve its marketing and community engagement.
However, some analysts are skeptical that it will pay off in the short term. “We do not believe the root of the challenges has been fully diagnosed and see the company as being in a holding pattern as we await the arrival of incoming CEO Heidi O’Neill in September,” BTIG analyst Janine Stichter wrote in a note to clients. Another analyst, BNP Paribas Securities, downgraded the stock to “Underperform” and cut its price target from $179 to $88. Stifel analyst Peter McGoldrick cut his price target from $176 to $134, although he maintained his “Hold” rating.
Now down 43% this year and trading at its lowest level since 2018, Lululemon faces a long road back and has substantial hurdles to clear. This is a stock to avoid for now.
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Patrick Sanders 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.
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