Lululemon Stock: Too Cheap to Ignore?

Key Points

• Lululemon slashed its full-year EPS guidance due in part to the removal of the de minimis e-commerce exemption.

• Comparable sales fell 4% as the company is facing a number of headwinds in the U.S.

• Lululemon's forward P/E has fallen to just 13.

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

Lululemon Athletica's (NASDAQ: LULU) dismal year just got even worse.

The stock tumbled 18.6% on Sept. 5 after it once again missed estimates and cut its full-year guidance due to weakness in the U.S. as it faces a range of challenges, some short-term and others more structural. The stock is now down 56% this year, a remarkable collapse for what has been one of the best-performing apparel stocks of the last 20 years.

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Revenue increased 7% to $2.53 billion in the quarter, slightly below the consensus at $2.54 billion, but nearly all of its growth came from new stores as comparable sales were up just 1% in the period.

Reflecting the challenges in the U.S., comparable sales in the Americas were down 4%. But they jumped 15% in the international segment, led by 17% growth in China, where the brand has found an audience.

However, the U.S. is its biggest market, and the company is facing myriad challenges there. That includes tariffs, which were exacerbated by the recent announcement that the de minimis exemption on e-commerce would end, meaning e-commerce orders that go from Canada to the U.S. would no longer be excluded. That was a major reason it cut its EPS guidance.

Image source: Getty Images.

While tariffs may just be a short-term issue, there are other stickier problems in the U.S. There are signs that the yoga pants category that Lululemon pioneered may be losing its popularity. According to reports in The Wall Street Journal and other outlets, leggings are being replaced by baggier garments. Lululemon is now hustling to catch up.

Additionally, the company is facing pressure from weak consumer sentiment and discretionary spending in the U.S. due in part to fears about tariffs and a potential recession.

Lululemon isn't alone here

Lululemon is clearly taking a beating in the stock market, and that's mostly warranted as the company just cut its full-year EPS guidance from $14.58-$14.78 to $12.77-$12.97.

However, it isn't unique among discretionary businesses in posting disappointing results in the U.S. Deckers, the maker of Hoka running shoes and Ugg sheepskin boots, is also facing pressure from tariffs, and reported a decline of 3% in the U.S. in the most recent quarter, while Nike has reported several quarters of declining sales in the U.S.

Those challenges have also extended to the restaurant industry as stalwarts like Chipotle, which saw comps decline in the first two quarters of the year, have struggled as well.

That should offer some reassurance to Lululemon and its investors even if it's facing other headwinds as well.

Management isn't shying away from the challenges. CEO Calvin McDonald said, "We are disappointed with our U.S. business results and aspects of our product execution. We have closely assessed the drivers of our underperformance and are continuing to take the necessary actions to strengthen our merchandise mix and accelerate our business."

On the earnings call, he also called out the need for more innovation in the lounge and social categories, saying that its selection had gotten stale. As a result, Lululemon plans to increase the percentage of new styles in its mix from 23% to 35% next spring. The company is also accelerating its go-to-market and design processes, which will help it respond to demand trends faster.

Is Lululemon a buy?

Even with the guidance cut and accounting for the struggles in the U.S., Lululemon looks surprisingly cheap, trading at a forward P/E of just 13, which puts it on par with no-growth and slow-growth companies on the market.

The headwinds from the tariffs are likely short term as the comparisons will get easier next year. The trend away from yoga pants is more of an issue, but the company is diversified in a wide range of products, and has the ability to adapt to changing tastes. Its brand is well established, even if it competes in a crowded market, and that should give it a competitive advantage even in new products.

Lululemon has also faced challenges before and rebounded, such as a massive pants recall over a decade ago.

While the company's challenges are likely to continue for at least the rest of the year, the stock looks cheap enough to justify a buy here, as it trades at a valuation that's just half of the S&P 500.

For patient investors, getting some exposure to Lululemon now should pay off.

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Jeremy Bowman has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Deckers Outdoor, and Lululemon Athletica Inc. The Motley Fool recommends the following options: short September 2025 $60 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.