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SUMMARY
Parkev Tatevosian, CFA, analyzes Lululemon's updated growth strategy, emphasizing the impact of tariffs on profitability and the company's focus on international expansion, particularly in China. Despite near-term margin pressures, he concludes that Lululemon stock appears undervalued with potential upside if tariff policies change.
MAIN POINTS
- Lululemon plans to open 40 to 45 net new stores globally in 2026, representing about 5% growth from its current base.
- The majority of new international stores will be in China, where Lululemon is experiencing strong year-over-year revenue growth.
- Tariffs are expected to further reduce Lululemon's gross profit margin by 120 basis points in 2026, following a 500 basis point decline the previous year.
- Operating margin is projected to fall below 20% in 2026, with earnings per share expected to drop to $12.20 from $13.26 in 2025.
- Lululemon is shifting its inventory strategy to focus on higher-priced products and fewer SKUs to offset increased costs from tariffs.
- The stock appears undervalued at $142 per share, with potential upside if future U.S. administrations reduce or remove tariffs.
DETAILED ANALYSIS
Lululemon is adjusting its growth trajectory in response to ongoing global economic challenges and persistent trade barriers, particularly U.S.-China tariffs. The company plans to open a net 40 to 45 new stores in 2026, a 5% increase from its current footprint of roughly 800 locations. Notably, only a small portion of these new stores will be in the United States, with the majority targeted for international markets, especially China, where Lululemon continues to see robust revenue growth exceeding 25% year-over-year.
This international focus is partly due to the unfavorable tariff environment for U.S.-based companies, a situation that has persisted since the initial tariffs imposed during the Trump administration and maintained under the current administration.
Tariffs are having a significant impact on Lululemon's profitability. The company expects its gross profit margin to decline by another 120 basis points in 2026, following a 500 basis point drop the previous year. This is attributed to the full-year effect of tariffs, which were only partially felt in 2025 due to inventory front-loading.
By 2026, with no opportunity to preemptively stockpile inventory, the negative impact on margins will be fully realized. Additionally, operating margins are projected to decrease by 250 basis points, potentially dropping below 20% for the first time in years. Earnings per share are forecasted to fall to $12.20 from $13.26 in 2025, reflecting these margin pressures.
In response, Lululemon is shifting its inventory strategy to emphasize higher-priced products and reduce the variety of SKUs, aiming to boost average selling prices and maintain profitability. The company is also investing in larger store formats, contributing to double-digit growth in overall square footage despite modest net new store openings. Despite these headwinds, the intrinsic value per share has been revised down to $183 from $240, but with the stock trading at $142, it remains undervalued.
The analysis suggests that while near-term challenges persist, a potential change in U.S. tariff policy could serve as a significant catalyst for future growth and margin recovery.
LINKS
- YouTube channel membership for exclusive perks and access to spreadsheets.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a six-step investing framework.
- Fiscal.ai investment research tool with a viewer discount.
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