Down 20%, Is Lululemon a Buy?

Core Viewpoint - Lululemon's shares dropped approximately 20% following a less optimistic earnings report, primarily due to increased costs from tariffs impacting earnings expectations for the year [1][3]. Financial Performance - Lululemon's revenue increased by 7%, but net income fell from $321 million to $314 million year-over-year in fiscal 2025's first quarter [6]. - Earnings per share (EPS) guidance for the year was reduced to a range of $14.58 to $14.78, down from $14.95 to $15.15 [3]. Impact of Tariffs - The weaker outlook is largely attributed to tariffs imposed by the Trump administration, particularly affecting Lululemon's production in Vietnam, where 40% of its manufacturing occurs [4]. - The tariff rate on imports from Vietnam is set at 46%, which is expected to increase production costs for Lululemon [4][7]. Market Conditions - The company faces challenges from rising production costs due to tariffs and potential dampening of sales from premium pricing, especially in a market with weak consumer spending growth [7]. - Comp sales increased only 1%, falling short of Wall Street's expectations of a 3% increase [6]. Valuation - Following the stock's decline, Lululemon's price-to-earnings (P/E) ratio has dropped to around 17, compared to its historical average of 42 [9]. - The stock is currently trading at approximately 18 times forward earnings based on the low end of the new guidance for 2025 [9]. Competitive Landscape - Lululemon operates in a highly competitive apparel market, contending for market share against brands like Nike and Gap [10]. - Price sensitivity is a critical factor in maintaining competitiveness within the industry [10].