Lululemon Earnings: Near-Term Outlook Dims, but Profitability and Underlying Brand Strength Hold

Since the beginning of 2024, Lululemon’s shares have plummeted nearly 50%, due primarily to concerns that its business in the Americas (73% of second-quarter sales) is being adversely affected by rising competition and changes in consumer tastes. Although its revenue growth in the region has slowed, it met our 1% estimate in the second quarter, and the firm’s overall profitability held up well. Indeed, its shares rose 4% in Aug. 29 after-hours trading, likely because pessimism by some investors and analysts going into the report was unusually high. Despite some challenges, we still think that Lululemon’s brand power, the source of our narrow moat rating based on an intangible asset, remains intact. We do not expect to make any material change to our $296 per share fair value estimate, leaving shares slightly undervalued.