The Case for Lululemon – A Deep Dive

Hey, have gotten some good feedback on a few previous posts, figured I would post this as well. Also, it is written for substack so charts/pictures are mostly missing, sorry 🙁

Waiting for the person who comes every time and accuses me of using AI.

Enjoy!

Most consumer brands are either focused on luxury or utility. Ferrari or Louis Vuitton are the former. Costco and McDonalds the latter. Lululemon doesn’t exactly fit either niche and maybe for that reason the stock is down a staggering 70% from its all time highs in December of 2023. Year-To-Date the stock has also performed extremely poorly down another 28% in the first few months of 2026. The stock is now at its lowest price this decade and seems poised to continue its negative trajectory. The sentiment around the company is negative, US sales are down and the current war with Iran could weigh on spending on luxury brands. However, there are positive signs as well, despite slowing down from its rapid revenue growth in the last few years, Lululemon’s revenue just hit an all time high and is up 5% from the previous year. The company is buying back shares rapidly and international revenue grew by 17% in 2025. While critics argue that the stock may be a value trap, it could also be an oversold company in a market that doesn’t understand the power of its brand.

What is Lululemon?

Lululemon is a high quality clothing brand that originally sold yoga clothing. Over the last two decades, they have expanded into every day clothing, shoes, accessories and personal care products. Lululemon prides itself in being more comfortable and durable than other products and has generated a cult like following. While $128 seems like a lot for a pair of pants, Lululemon argues that a pair of pants that will last for ten years are well worth the investment and investing in your wardrobe is better than buying low quality products that will need to be replaced often. Critics argue that the cost is not worth the product and point to competitors with significantly cheaper prices for similar products.

For years the company expanded rapidly. As the company grew, their aspirations to speed up growth grew with the company and all of a sudden the company started having missteps. Problems with the brand like “pantsgate”, where Lululemon put out and then pulled back see through leggings began coming up, something the former founder Chip Wilson called “a new low.” Chip Wilson who stepped away from leadership but remained the largest shareholder was very public in his criticism of the company for focusing on revenues as opposed to the product, something that is antithetical to what he believed to be the brands ethos. Days later in January of 2026, CEO Calvin McDonald who was with the company since 2018 stepped down. The departure was seen as sudden and there has not been a clear replacement yet. This has contributed to the uncertainty around the company and its vague future and the stock has responded with a sharp 30% decline since the beginning of the year.

Recently, Costco released a $20 alternative to Lululemon’s pants that were so good that it caused Lululemon to sue Costco for selling cheap knockoffs. Lululemon might win the lawsuit, but this could be a Pyrrhic victory, a victory that comes as a devastating loss in the bigger picture. Even if Lululemon wins the lawsuit, suing a competitor for selling a similar product at a fraction of the cost likely will not benefit the brand image in the long term. The best advertising Costco could have done is Lululemon themselves admitting that their product is at risk of being replaced by Costco. Costco is not the only one, and many cheaper competitors have released alternatives that threaten Lululemon’s moat. That being said, cheap alternatives have been around for years, Nike deals with similar competition as does every brand that has expensive products.

This raises the question, if their product is not significantly better than competition and much more expensive is there a reason to buy Lululemon? This is not a question of whether or not Lululemon sells good products – which they do, it is a question of whether its brand can sustain pricing power in an industry with extremely low switching costs.

Logic would tell you no, right?

Not exactly.

Luxury brands sell for brand recognition not necessarily the quality of product. Nobody who spends $5,000 on a Louis Vuitton purse buys it because of the superior quality of the leather. They buy it for the fashion (or wealth) statement. A $10,000 Rolex watch is not bought for the beautiful silver style but rather for the ability to say “I have a Rolex on my hand.” If Lululemon is a luxury brand, the cheap pants that Costco and other brands offer are not a real threat rather a cheap knock off to look down upon. And this is one of Lululemon’s goals. To brand themselves as a superior product that comes with a designer feel, a premium lifestyle brand that shows status and wealth. Lululemon will live or die on brand momentum, not the product itself. And unlike Louis Vuitton where the products are only for a very few select group of people, the average person CAN afford to buy a Lululemon product and feel wealthy. The cheapest Lululemon water bottles sells at $14, a meager price to pay for an entry ticket into the wealthy society. Not coincidentally, the water bottle displays the full brand name written on it in massive letters. The water bottle is just an example of how a relatively cheap product can feel like an entry point into wealthy society. While this may sound ridiculous, we live in a world that is materialistic and for a teenage girl spending 5.3 hours a day on social media, an entry into the 1% may be all that she desires. Lululemon offers this at a price that while not cheap is not exorbitant. Nobody will notice if you have Costco pants, they will if you are wearing Lululemon.

China:

Speaking of a materialistic culture, one of the most materialistic country in the world is China. A 2022 study said that 71% of Chinese people surveyed agreed with the statement “I measure my success by the things that I own.” Significantly higher than the second place country, India (at 58%), the global average (34%) and the US (21%). It is maybe for this reason that China leads the global market surge with an average of a 41% revenue CAGR over the last four years. US growth in the last few years has by contrast been flat. And while the US is Lululemon’s largest revenue stream currently making up about two thirds of revenue, China’s market is massive and expanding rapidly. If Lululemon can pivot from having the majority of their revenue in the US to expanding their revenue worldwide (which is what they seem to be doing), there is a decent chance that the company can grow and the stock can see a resurgence. One thing to note here is that Chinese customers are famously trend-sensitive and while today Lululemon might be seen as the current fad, tomorrow that fad can pass. A change in sentiment would seriously dampen their prospects of rapid international expansion.

The Valuation:

Lululemon is trading at its lowest valuations in over a decade with 11 price to earnings, a 19.5 price to free cash flow and a 1.6 price to sales. If you look at the graph below, indexed to zero, you can see that every single valuation metric is lower than it has been in the last decade. Part of this is simply a company that was overvalued that has now dropped to a reasonable valuation. But the company is not just cheap when compared to itself, but rather also cheap in comparison to the whole industry. Nike trades at a 31 P/E ratio ONON (the stock of the On Cloud shoes brand) trades at a 47, Adidas sits at an 18 and American Eagle at 15.5. Meanwhile luxury brands are also trading at a higher P/E. Louis Vuitton is at a 21.4, Dior a 17.7 and Prada at 13. Lululemon is currently caught in the middle of trying to decide whether they are a luxury brand or a utility company and as such are getting priced as neither. The market is pricing in an identity crisis along with slowing US revenue and concerns that the product is not superior enough for them to charge the prices they do. Costco pants may not be as good, but for 20% the price, good enough might be enough to kill Lululemon’s business.

One positive indicator of the business is that they have a very healthy balance sheet, $0 in debt and over $1.81 billion in cash. They consistently buy back an increasing amount of shares every year and over the last ten years have bought back an average of 1.48% of their shares every year. Lululemon is planning to continue with their buyback program allocating $1.2 billion to share buybacks in 2026. With their stock based compensation being minimal (under $100 million in the last few years and likely the same in 2026) and due to the stock going down dramatically over the last few years, the $1.2 billion in buybacks this year could retire around 6% of the company’s shares.

Discounted Cash Flow (DCF) Calculator:

I used relatively conservative but positive metrics for Lululemon. I assumed their P/E multiple will increase to 15, significantly lower than what it has traded at over the last few years and a more similar number to a mature company like American Eagle This is based on the assumption that sentiment is at an all time low and if they can turn around some of negative sentiment, they can likely rebound to at least a slightly higher valuation. I assumed their EPS will grow at 5% rate per year, fueled by international growth and share buybacks. I received a five year CAGR of 13.2% which is slightly below my desired 15% returns but still a very attractive return. If we look at a more bullish scenario where the stock can grow at 8% a year and a fair P/E is 20, the stock should return around 23% over the next five years getting back to around a stock price of 425, or almost tripling within the next five years. If the narrative does not change and the P/E stays around 12, even if EPS grows by around 5% per year the stock would only return less than 7% CAGR, likely underperforming the market.

And so today Lululemon is either a value trap or a misunderstood stock that has enormous upside. The decision to invest in them is a decision to believe that the brand is more important than the product. The perfect scenario for Lululemon is that they transition into a company viewed in a similar light to Apple, a premium price for a premium product that makes a statement. However, its important to note that Apple has massive switching costs which don’t exist with Lululemon’s products. A customer who has been downloading his data to iCloud for the past ten years and uses Apple music, air pods, a phone and a MacBook is deeply ingrained in the Apple ecosystem. A Lululemon customer who enjoys wearing their pants can easily change to wearing a different brand of pants, especially if they don’t care about the brand statement that Lululemon makes.

Today, I think this is likely a stock that sees one of two directions, a continuous relatively slow downwards trend, or a stock that rebrands and subsequently rebounds. While they may not reach the December 2023 peak it can continuously return above market returns year after year. The question of investing in them relies on whether you want to take a chance on a company with a product that isn’t necessarily better than competitors with a brand that carries the product. If you do chose to do it, I would price it accordingly and have it as a relatively small bet in your portfolio in case the stock turns into dead money over the next few years. Personally, for now I am staying away from Lululemon. I might revisit this position in a few months, especially if revenue continues increasingly worldwide and specifically in China.

Disclaimer: For those of you reading this, remember I’m sharing my personal journey and opinions, not professional investment picks.