Hook / Thesis
Markets have punished Lululemon aggressively: the stock that traded above $400 in 2025 has re-priced to roughly $202 as of 01/19/2026. That sharp move has compressed the valuation despite a clear improvement in operating results. I view LULU as a contrarian, asymmetric opportunity for 2026: the company is still generating healthy profits, the margin cadence is improving, and there are several near-term catalysts that can re-rate the shares if management resolves governance questions and inventories normalize.
My trade is directional - I am constructive and plan a position-sized long with a hard stop. The idea is not a lottery ticket: use confirmed support near current levels, size for limited downside, and target a rerating back toward mid-20s P/E if fundamentals continue to heal.
What the company does and why the market should care
lululemon athletica designs and sells premium athletic apparel, footwear, and accessories through more than 800 company-owned stores globally and a sizable digital channel. The brand is high-margin and has historically commanded above-average profitability within apparel because of strong direct-to-consumer economics, pricing power, and sticky lifestyle positioning.
The key fundamental drivers the market should watch are:
- Top-line growth in North America and international expansion.
- Gross margin and operating leverage - the company still prints meaningful operating income dollars.
- Working capital, especially inventory levels, which impact promotions and margin.
- Capital allocation (share buybacks, which management has used aggressively in the past) and corporate governance signs such as the CEO search and board actions.
Recent performance - the numbers that matter
Use the most recent quarterly filings as the basis for the setup. For the quarter ended 08/03/2025 (Q2 fiscal 2026) lululemon reported:
- Revenue: $2,525,219,000.
- Gross profit: $1,477,202,000.
- Operating income: $523,814,000.
- Net income: $370,905,000 and diluted EPS of $3.10 on diluted average shares of ~119.68 million.
- Operating cash flow (quarter): $328,676,000.
- Inventory: $1,722,570,000 versus current assets of $3,528,728,000 (inventory is ~49% of current assets).
Sequentially the company showed improvement versus Q1 (ended 05/04/2025): revenue rose from $2,370,660,000 to $2,525,219,000 and diluted EPS increased from $2.60 to $3.10. Operating income jumped from $438,625,000 to $523,814,000 over the same two quarters - showing leverage coming through.
Putting four recent quarters together (Q2 FY2026, Q1 FY2026, Q3 FY2025, Q2 FY2025) yields a rough trailing four-quarter diluted EPS of about $11.72 (3.10 + 2.60 + 2.87 + 3.15). With the stock trading near $202, that implies a P/E of roughly 17x. Using diluted shares of ~119.68 million and the current price gives an implied market capitalization of about $24.2 billion and an earnings yield near 5.8%.
Valuation framing - why the multiple looks reasonable
Relative to the recent peak share prices above $400, the market has halved the company's market value in 12 months while profitability (on a trailing basis) remains intact at roughly $1.43 billion of combined net income across the last four quarters. That means a lot of the sell-off is narrative-driven rather than earnings-driven.
At ~17x trailing EPS, the stock is not dirt-cheap in absolute terms - but it is materially cheaper than where it traded at higher prices with a similar earnings base. If the company maintains current profitability and management executes a credible leadership transition plus inventory normalization, a re-rating back toward the mid-20s P/E is realistic - that is my upside case and the basis for the targets below.
Catalysts (what can move the stock)
- Resolution of the CEO search and governance noise - clarity reduces risk premium.
- Inventory normalization - reductions in promotional activity would help gross margin.
- Share repurchase acceleration or a buyback announcement - the company has used buybacks in the past and media has flagged buyback programs as an investor focus.
- International expansion and comp recovery in North America - sequential revenue strength already visible across recent quarters.
- Tariff and regulatory clarity - headlines around tariffs have weighed on the shares and any clarity would remove a headline risk.
Actionable trade plan - this is a position trade sized to a mid-risk portfolio allocation.
Trade direction: Long (contrarian position)
Entry zone: $195 - $210. The stock is trading in that range as of 01/19/2026; I prefer to establish a position near the lower end of the range if available.
Initial stop: $165 (stop-loss ~20% below the $205 midpoint). A hard stop at $165 limits downside to a known quantum and sits below recent price action and where large-volume earlier floors existed in the prior down-leg.
Targets:
- Target 1 (near-term, 3-6 months): $260 - implied move to ~22x my trailing EPS (~$11.72 * 22 = $257).
- Target 2 (larger re-rate, 6-12 months): $320 - re-rating toward ~27x or higher if growth accelerates or buybacks are sizeable.
Position sizing & risk framing: Size the position so the loss to stop represents no more than 1-2% of total portfolio capital. This is not a full-tilt long; treat it as a tactical contrarian position with a defined exit.
Risks and counterarguments
- Governance and leadership risk: Recent headlines show the CEO search is complicated and there have been proxy/activist dynamics reported. Management turnover or a messy transition could prolong investor nervousness and depress valuation further.
- Inventory and promotion pressure: Inventory is elevated at $1.722B and represents nearly half of current assets. If the company is forced into deeper promotions to clear stock, gross margins could compress and earnings fall short of expectations.
- Macroeconomic/consumer risk: Premium athleisure depends on discretionary spending. A macro shock or slower consumer spending could hit comps and margins quickly.
- Tariffs and regulatory headlines: Media has pointed to tariffs and supply-chain uncertainty; new tariffs or unfavorable rulings could add cost pressure or slow international expansion.
- Counterargument - secular decline in brand relevance: Critics could argue that the athleisure category is crowded and Lululemon’s premium pricing is at risk if brand momentum stalls. If competitors meaningfully gain share, the multiple compression could be permanent rather than cyclical.
Balance those risks against the facts: Lululemon is still generating operating income of over $500M in the most recent quarter and produced positive operating cash flow. The bird in hand - stable profits - offsets some headline-driven uncertainty.
What would change my mind
I would reduce conviction or exit the trade if any of the following occur:
- Q3/Q4 filings show an unexpected step-down in gross margin or a sustained net income decline across two consecutive quarters driven by promotional activity.
- Inventory trends worsen materially (quarter-over-quarter inventory growth while revenues decline), indicating structural demand weakness rather than temporary channel noise.
- Corporate governance results in disruptive leadership that steps away from shareholder-friendly capital allocation - for example, a pause on buybacks combined with actions that dilute shareholder value.
Final thoughts - stance
I'm constructive: Lululemon's brand, profitability, and cash-generation profile make it a reasonable candidate for a contrarian position into 2026. The stock is cheaper than it was a year ago and the earnings base remains intact. That combination - earnings that have held up and a lower multiple - creates an asymmetric upside if management resolves governance issues and the company normalizes inventory and margins.
Execute the trade with discipline: enter in the $195 - $210 zone, use a $165 hard stop, and set staggered targets at $260 and $320. Size to limit portfolio downside to 1-2% if the stop is hit. This is a position trade that relies on fundamentals recovering and headline risk receding; if either fails, be ready to pull the plug.
Note: Financials referenced are from the company's quarterly filings through 09/04/2025 and include Q2 fiscal 2026 results. Price and market measures are based on market prints and diluted share counts disclosed in filings.