Lululemon Stock Investors Might Be Surprised to See This | LULU Stock Earnings Review Part 4

SUMMARY

Parkev Tatevosian, CFA, analyzes Lululemon's latest quarterly earnings, highlighting the stark contrast between international and North American revenue growth. The discussion centers on the significant impact of U.S. tariffs on profitability and the company's valuation outlook.

MAIN POINTS

• Lululemon's total revenue increased by 1% to $3.6 billion in the fourth quarter, with adjusted growth of 6% excluding an extra week in the prior year. [0:00]
• Comparable store sales in North America were down 2%, while international sales, especially in China Mainland, surged with revenue up 28% and comparable sales up 26%. [1:01]
• Lululemon expanded its global store count to 811 and saw online revenues rise by 9%, contributing $1.9 billion to total revenue. [2:02]
• Gross profit margin dropped from 60.4% to 54.9% year-over-year, primarily due to a 520 basis point negative impact from increased tariffs. [3:00]
• Tariff increases and the removal of import duty loopholes led to a significant decline in Lululemon's operating income and profit margins. [4:00]
• Despite tariff pressures, Lululemon remains more profitable than competitors and is trading at its lowest valuation, with a forward PE of 11.94 and a discounted cash flow valuation of $249 versus a market price of $143. [6:01]

DETAILED ANALYSIS

Lululemon's fourth quarter financial performance reveals a nuanced picture shaped by regional disparities and external trade pressures. The company's reported revenue growth was modest at 1%, but after adjusting for an extra week in the prior year's quarter, underlying sales growth stood at a healthier 6%. This adjustment is crucial for an accurate year-over-year comparison, as the additional week previously inflated sales figures.

The most notable divergence emerged between North America and international markets. While North American revenue was essentially flat and comparable store sales declined by 2%, international markets—particularly China Mainland—displayed robust momentum, with revenue increasing by 28% and comparable store sales up 26%. This contrast underscores the growing importance of Lululemon's global expansion strategy amid domestic headwinds.

The primary challenge in the United States stems from heightened tariffs and the elimination of certain import duty loopholes. These trade barriers have forced Lululemon to choose between absorbing higher costs, which erodes profit margins, or raising prices, which could dampen demand. The company appears to be absorbing most of these costs, as evidenced by a sharp decline in gross profit margin from 60.4% to 54.9%, with tariffs alone accounting for a 520 basis point reduction.

Operating income also fell, with margins dropping from 28.9% to 22.3% year-over-year. Despite these setbacks, Lululemon remains one of the most profitable brands in its sector, outperforming major competitors like Nike in terms of profitability.

Store expansion continues, with 44 net new stores added since the previous year and online sales contributing significantly to overall revenue. The company is strategically positioned to shift more product to international markets, potentially mitigating some of the negative effects of U.S. tariffs. From a valuation perspective, Lululemon's stock is currently trading at historically low multiples, with a forward price-to-earnings ratio of 11.94 and a discounted cash flow valuation suggesting substantial upside compared to the current market price.

This combination of resilient profitability, international growth, and attractive valuation supports a positive long-term outlook despite near-term challenges.

LINKS

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