Is Lululemon Back? What's Driving the Stock's Strong Gains This Month?

Core Viewpoint - Lululemon Athletica's stock has experienced significant volatility in 2025, with a recent rally following solid fiscal Q3 results and the announcement of a new CEO search, although the stock remains down approximately 45% year-to-date [1] Financial Performance - Lululemon reported a 7% year-over-year revenue increase to $2.57 billion, surpassing the $2.48 billion consensus [5] - Adjusted earnings per share (EPS) decreased by 11% to $2.59, but exceeded the $2.25 consensus [5] - International revenue surged by 33%, with comparable-store sales rising by 18% [6] - Sales in China increased by 47% to $465.4 million, with same-store sales up 25% [6] - Revenue from the rest of the world grew by 19% to $367.2 million, with comparable-store sales increasing by 9% [6] Challenges - North American operations faced difficulties, with revenue declining by 2% to $1.7 billion and same-store sales dropping by 5% [7] - Gross margin decreased by 290 basis points to 55.6%, with a forecasted decline of 580 basis points for Q4 [7] - Inventory levels rose by 11% year-over-year to $2 billion, which could lead to markdowns if sales do not keep pace [8] Future Outlook - Lululemon raised its fiscal year sales guidance to between $10.96 billion and $11.05 billion, reflecting a growth of 4%, and adjusted EPS guidance to a range of $12.92 to $13.02 [9] - For fiscal Q4, projected sales are between $3.5 billion and $3.585 billion, with adjusted EPS expected between $4.66 and $4.76, indicating a potential decline of 3% to 1% [10] Leadership Change - The upcoming leadership change, with CEO Calvin McDonald stepping down at the end of January, is seen as a potential catalyst for a turnaround amid increased competition in the athleisure market [3][4] - The company is under pressure to revitalize its North American business while adapting to changing fashion trends [12] Valuation - Lululemon currently trades at a forward price-to-earnings (P/E) ratio of approximately 16 times next year's analyst estimates, which is considered reasonable [13]