Buy the Management Shock: Lululemon Looks Cheap After the Sell-Off — Tactical Long

Hook / Thesis

Lululemon has become the kind of trade idea I like to see: headline-driven downside with intact underlying economics. The stock is trading near $201.87 (last trade snapshot), roughly half of the $400+ levels it traded at during the prior cycle, yet the business continues to generate strong gross margins, healthy operating margins and meaningful operating cash flow. That divergence - real operational strength versus headline risk around management and policy - creates a tactical long opportunity.

We are not dismissing the uncertainty. A CEO search, proxy activity and tariff headlines are legitimate near-term overhangs. But the numbers argue the company is not broken: Q2 (period ending 08/03/2025) revenue was $2.525 billion, gross profit was $1.477 billion (about a 58.5% gross margin), and operating income was $523.8 million (roughly a 20.7% operating margin). Those are not the metrics of a company that should trade at distressed multiples. This trade idea lays out how to buy the weakness with defined risk control and staged profit-taking.

What the company does and why it matters

Lululemon Athletica designs and sells athletic apparel, footwear and accessories, primarily through its digital channels and more than 800 company-owned stores across North America, Asia and Western Europe. The brand remains a leader in premium athleisure, a space where differentiated direct-to-consumer economics (high gross margins, strong customer loyalty) matter. For investors, the combination of high gross margins, recurring consumer demand for core categories, and the company's capital allocation (buybacks visible in the cash flow statement) are the fundamental drivers to care about.

Recent results that support the trade

• Q2 (ended 08/03/2025) revenue: $2,525,219,000.
• Q2 gross profit: $1,477,202,000 - gross margin approximately 58.5% (1,477,202 / 2,525,219).
• Q2 operating income: $523,814,000 - operating margin approximately 20.7% (523,814 / 2,525,219).
• Q2 net income: $370,905,000; diluted EPS for the quarter: $3.10 on diluted average shares of 119,680,000.
• Operating cash flow (Q2): $328,676,000 and net cash flow from financing negative $276,849,000 (consistent with buybacks/returns of capital).
• Inventory on the balance sheet (Q2): $1,722,570,000; current liabilities $1,557,346,000; equity $4,387,279,000.

Put simply: revenue is in the $2.3-2.5B quarterly range, margins remain premium, and the company is still generating operating cash. Management has used cash to reduce shares outstanding over recent quarters - diluted average shares fell from ~120.84M in Q1 to ~119.68M in Q2 - which supports EPS resilience even if top-line growth slows.

Valuation framing - why I call it ultracheap

Using recent reported quarterly EPS and the last price snapshot, the valuation looks compelling on a re-rating basis. Summing the last four reported quarterly diluted EPS figures gives an approximate TTM EPS of:

Q2 FY2026 (08/03/2025): 3.10
Q1 FY2026 (05/04/2025): 2.60
Q3 FY2025 (10/27/2024): 2.87
Q2 FY2025 (07/28/2024): 3.15
TTM approx EPS = 11.72

At the last trade of $201.87, that implies a P/E of roughly 17.2x (201.87 / 11.72). Market cap (implied) using diluted shares of 119.68M is about $24.2 billion (201.87 * 119.68M). Book value / equity per the latest balance sheet is $4.387 billion, so market cap to book is ~5.5x (24.2B / 4.387B). That P/E in the high teens is a material compression versus where the stock traded when the share price was near the 400s - the sell-off has pulled valuation back by roughly half while margins remain strong.

Qualitatively: the business still delivers premium gross margins (near 58%) and operating margins above 20%. If Lululemon reclaims a mid-cycle multiple (say 20-25x) on the same EPS base, the upside is large. Using the TTM EPS ~11.72:

11.72 * 22 = $258 (near-term re-rating target)
11.72 * 25 = $293 (full re-rating target)

Catalysts (what could re-rate the stock)

• CEO appointment and board stability - a clean succession removes headline risk and should materially reduce the discount.
• Q4 / fiscal guidance that shows stable-to-improving North American comp trends or better-than-expected international growth.
• Acceleration of buybacks / clearer capital return program - financing cash flow has been negative and share count is coming down; confirmation would support EPS upside.
• Margin persistence or expansion - continued 50%+ gross margin and 18-22% operating margin would justify a higher multiple.

Trade plan - actionable with entries, stops and targets

• Trade direction: Long LULU.
• Entry: Buy between $195 - $210. The current snapshot trades around $201.87; this band allows small execution flexibility.
• Initial stop-loss: 10% below entry. For a $202 entry, stop at $182 (risk control; captures headline-driven downside while preserving upside if fundamentals hold).
• Target 1 (near-term): $258 (implies ~28% upside from $202; corresponds to ~22x TTM EPS of ~11.72).
• Target 2 (medium-term stretch): $293 (implies ~45% upside; corresponds to ~25x TTM EPS).
• Position sizing: Keep a defined position sized so the initial stop-loss risk is no more than 1-2% of portfolio capital (classic risk-management sizing).
• Time horizon: Swing / position trade - expect catalysts within 3-9 months, though catalysts could arrive sooner or later.

Risks and counterarguments

There are several legitimate reasons this trade could fail; any one of them would keep the stock lower for longer.

• Management risk and execution - a prolonged CEO search or divisive proxy battle could sap investor confidence and slow strategic execution. If board instability persists, multiple expansion may be blocked.
• North American sales weakness - earlier headlines and reports referenced North American softness. If comps deteriorate materially, EPS will follow and the multiple contraction is justified.
• Tariffs / supply chain pressure - tariff changes or input-cost shocks could compress gross margins. Inventory is elevated (~$1.722B in Q2); missteps there could force markdowns and margin erosion.
• Macro / sentiment shock - premium discretionary names often suffer outsized moves in risk-off episodes; this is a sentiment-sensitive name and can gap lower on macro headlines.
• Valuation re-rating not guaranteed - the market may assign a structurally lower multiple to Lululemon if it deems growth has slowed permanently. A lower steady-state multiple (e.g., sub-15x) materially reduces upside.

Counterargument to my thesis: Management and strategic uncertainty may reveal deeper problems: product missteps, brand fatigue or secular shifts away from premium athleisure. If investors believe growth is permanently impaired, the compressed multiple is appropriate and the stock could trade sideways or lower despite decent near-term numbers.

What would change my mind

I would pare back or flip this trade if any of the following occurs:

• A quarter showing material gross margin contraction (sequential decline >300bp) or clear evidence of large markdowns tied to inventory write-downs.
• Management guidance that materially reduces FY outlook (misses consensus by a wide margin) and indicates structural demand loss in North America.
• Board or proxy developments that lead to sustained governance turmoil (litigation, ongoing activist conflict with no resolution).

Bottom line

Lululemon is a high-quality consumer brand trading at drastically lower market pricing than just a year ago, while the business still delivers premium gross margins (~58%), operating margins >20% and positive operating cash flow ($328.7M in Q2). The headline risk from management changes is real and must be respected, but it creates a clearly defined, asymmetric trade for disciplined investors: buy within a tight band around $195-$210, use a 10% stop, and take profits in stages around $258 and $293 as the company stabilizes its leadership and the market re-assesses multiples.

This is a tactical, catalyst-driven long: higher conviction if the CEO appointment and guidance clarity arrive, lower conviction if margins or comps deteriorate materially. Position size accordingly and treat the trade as a volatility play with a defined exit if headlines turn into structural evidence of a slowed business.

Disclosure

This is a trade idea, not personalized financial advice. Always size positions to your risk tolerance and verify execution prices before trading.