Lululemon Pulls Back Into Classic Dip-Buying Opportunity

Key Points

• Lululemon shares pulled back on soft guidance, opening up a buying opportunity for Q2 2025.
• Macroeconomic headwinds impact consumer habits; Lululemon is building leverage with store count and quality.
• Analysts reset their targets but continue to see a double-digit upside from the critical support level this year. 

Lululemon NASDAQ: LULU shares dropped precipitously following its 2025 guidance because it was weak. However, the guidance calls for growth and weakness, not because of some operational shortcoming but rather the economy at large and general headwind for retailers. Lululemon has no control over the macroeconomic situation, only its operations, which are growing, and earnings quality, which is improving.

The takeaway is that Lululemon is building leverage for itself and investors, its cash flow is solid, its balance sheet is healthy, and its capital returns are flowing, so the double-digit price discount looks like a good time to buy. 

Lululemon Outperforms, But Cautious Guidance Weighs on Shares

Lululemon had a solid quarter in Q4 2024, outperforming on the top and bottom lines, with bottom-line outperformance standing out. The $3.61 billion in net revenue is up by 13% and outpaced by 85 basis points, while the GAAP diluted EPS grew by 16% and outpaced by 450 basis points. 

The revenue strength was driven by a 3% comp, 4% FX-adjusted growth in all product categories (which measures growth excluding the impact of foreign exchange rate fluctuations), and an increased store count. The store count grew by 2.4% in the quarter and 7.4% compared to last year, with much of the growth overseas. The Americas segment revenue grew by 8% on a flat comp, while International sales advanced by 40% FX-adjusted on a 20% comp-store increase.

The margin news is good. The company widened its gross and operating margins despite increased SG&A related to growth, store count, and labor. The gross margin widened by 100 basis points and the operating margin by 40 basis points, driving accelerated earnings growth at all levels. 

Guidance is the market’s sticking point, and the CEO's comments about economic headwinds impact consumer spending. The takeaway is that Q1 and FY2025 revenue and earnings targets are below the analysts’ consensus, but the bar was set high with revisions, and growth is expected. The company forecasts a high-single-digit top-line growth pace and slightly slower growth on the bottom line, sufficient to sustain the growth outlook, balance sheet health, and capital returns. 

Lululemon’s Capital Return Is Significant and Safe

Lululemon’s capital return is entirely share repurchases, but they are no less significant, shaving 3.7% off of the share count in F2024. The balance sheet reflects the capital return and business investment, including reduced cash, but no red flags are present. The cash reduction is offset by increased property, total assets, and equity, which increased by 2%. The outlook for 2025 is for buybacks to continue at a similar pace, if not improve, and for another equity gain for shareholders. 

Analysts reset their price targets following the guidance update, which will be a headwind for the market in Q2 2025. However, the consensus sentiment remains firm at Moderate Buy, and the price target reductions align with the consensus estimate reported by MarketBeat, expecting a 20% upside from the critical support level. 

Market action could be volatile over the next few months. Institutional support is strong, and the buying activity is ramping higher as the share price declines, but sellers are also active, aiding in the decline. 

The critical support level is near recent lows at $300 and will likely be tested before the market can rebound. The risk is that Lululemon’s stock could fall below $300 and trigger a deeper sell-off. The likely scenario is that LULU stock will find a bottom at or near $300 and establish a new support base in anticipation of the following quarterly report.