Is the Party Over for Lululemon Stock?

Key Points

• Lululemon's stock has plunged nearly 60% from its all-time highs.

• It's struggling with tough competitive and macro headwinds.

• The stock looks cheap, but it could deserve that discount valuation.

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

Lululemon (NASDAQ: LULU) stock closed at its all-time high of $511.29 on Dec. 29, 2023. That 5,581% gain from its split-adjusted IPO price of $9 in July 2007 would have turned a $10,000 investment into $568,100. The yoga and athletic apparel retailer impressed the bulls with its resilience during the early days of the pandemic and its ambitious growth plans.

But today, Lululemon's stock trades at about $220. It lost its luster as its North American growth stalled out and it faced tougher competition from smaller and cheaper brands, and tariffs exacerbated that pressure. So is the party over for this former high-growth stock?

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Image source: Getty Images.

What happened to Lululemon over the past three years?

Lululemon established an early mover's advantage in the premium yoga apparel space, and it profited from the rapid growth of the athleisure market. It expanded its digital marketplace and opened more brick-and-mortar stores to boost its direct-to-consumer sales, and it used free yoga classes and other community events to lock in its customers.

Back in 2019, Lululemon launched its "Power of Three" plan to double digital revenues, double its men's revenues, and quadruple its international revenues from fiscal 2018 (which ended in February 2019) over the following five years. It achieved all of those goals ahead of schedule, even as it temporarily closed some of its stores during the pandemic.

That success prompted Lululemon to launch a new "Power of Three x2" plan in 2022, which set the same goals for doubling its men's revenues and quadrupling its international revenues from fiscal 2021 to fiscal 2026. It expected that new plan to nearly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion in fiscal 2026.

But over the past three years, its top-line growth decelerated. Its sales of women's apparel in North America slowed down as it grappled with weak consumer spending and tougher competition from Costco's (NASDAQ: COST) Kirkland apparel, Amazon's (NASDAQ: AMZN) private label apparel, and smaller brands like Alo Yoga, Vuori, and Gymshark.

Data source: Lululemon. FY = fiscal year.

Lululemon's overseas expansion and new products (including Glow Up, Daydrift, and BeCalm) couldn't offset its soft sales of women's apparel in the U.S. market. To make matters worse, its chief product officer Sun Choe, who had held that key position since 2018, abruptly resigned last year.

All of those challenges eroded Lululemon's pricing power, so it relied more heavily on markdowns to drive its revenue growth. It also absorbed the higher costs from inflation and overseas tariffs instead of passing those expenses onto its consumers. Despite that pressure, its gross margin still expanded from 55.4% in fiscal 2022 to 59.2% in fiscal 2024 as it reduced its freight and input costs, reined in its markdowns, and prioritized sales of higher-margin products in higher-margin markets.

What will happen to Lululemon over the next three years?

During Lululemon's latest conference call for the first quarter of 2025, CEO Calvin McDonald said he was "definitely not happy" with the brand's performance in the U.S. -- and that its consumers remain "cautious" and "discerning" in this choppy macro environment.

Nevertheless, McDonald reaffirmed the company's commitment to its "Power of Three x2" targets. Therefore, investors can still expect Lululemon to generate at least $12.5 billion in revenue in fiscal 2026 -- but that would only represent a compound annual growth rate of 8.6% from fiscal 2024.

Analysts are less optimistic. They expect its revenue to only grow 6% to $11.2 billion in fiscal 2025 (which ends in February 2026), 7% to $12.0 billion in fiscal 2026, and 6% to $12.7 billion in fiscal 2027. Its EPS is expected to stay nearly flat in fiscal 2025, rise 6% in fiscal 2026, and grow 4% in fiscal 2027.

We should take those longer-term estimates with a grain of salt, but they suggest the company will keep struggling in the saturated North American market and rely more heavily on its overseas growth. It also probably won't launch another "Power of Three" growth plan in the future.

From a growth stock to a value stock

Lululemon's stock looks cheap at just 15 times this year's earnings, but it deserves that lower valuation because its core growth engine is cooling off. Its downside potential might be limited, but it won't revisit its all-time highs anytime soon. For now, the party is over for Lululemon -- but it could eventually find fresh ways to revive its brand.

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Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Lululemon Athletica Inc. The Motley Fool has a disclosure policy.