Lululemon Can Beat Q2 EPS and Still Be Going Backward

UBS told investors on August 25 that Lululemon (LULU) is set to top Wall Street's expectations for second-quarter earnings, helped along by cost control and share repurchases. The stock fell 3.6% to $118.33 the same day. That apparent contradiction is the most useful thing in the call: the same note that predicts the beat also warns that the full-year outlook is probably about to be cut a second time, to roughly $9.70–$9.90 a share from a current $10.95–$11.15, and trims its price target to $120.

The quarter that closed in early August reports Thursday, September 3. Management already guided that quarter's earnings to $1.76–$1.81 a share. A year earlier, the same quarter produced $3.10. Do the arithmetic the analyst way: even if Lululemon tops the number it is guiding to, per-share earnings will land roughly 40% below last year's quarter. The buyback shrinks the denominator and cost cuts protect what is left — that is how an earnings "beat" can happen while the underlying business is still going the other way. This is a lower bar, not a recovery.

The company's own last reported quarter shows why. In the first quarter, revenue ticked up about 4% to $2.47 billion and diluted earnings fell from $2.60 to $1.69 a share. Gross margin dropped 4.1 points to 54.2%, and management put tariffs at 2.8 points of that decline, with more discounting on top. Americas comparable sales fell 5% — the fifth straight quarter of decline — and the company expects North American sales to fall by a low-double-digit percentage in the current quarter. International is the healthy part, with sales up 22% and China growing in the mid-to-high teens, but the Americas are the majority of the business, and they are still getting worse.

Now the number that matters more than the beat. The market already prices Lululemon as a shrinking brand: the stock is down more than 40% this year and trades around 11 times the midpoint of its own (already cut) earnings guidance. On the last twelve months' free cash flow of roughly $1.3 billion against a $12.8 billion market cap, the free-cash-flow yield is about 10%. There is $1.5 billion of cash and no net debt. The buyback that props up the per-share numbers is real capital: a $1.6 billion authorization, of which the company spent $358 million buying back shares in the first quarter alone. UBS itself concedes that the already-bearish sentiment may be reflected in the stock's low valuation. This is the honest core of the cheapness — it is not a leveraged balance-sheet trick. Tape pain is not the same as a broken company here; the cash flow has not broken.

What has kept breaking is the guidance. In March, at the fiscal 2025 results, Lululemon aimed for $12.10–$12.30 a share this year. By the June first-quarter report it had cut that to $10.95–$11.15. UBS now models a second cut, to around $9.70–$9.90. Each time the market began pricing the company for a gradual decline, the company raised the slope. A beaten stock only becomes a setup when the numbers diverge from the pain; here the numbers keep confirming it.

The route to a turn is visible inside management's own projections. Full-year gross margin is guided down only 0.9 points, which implies the margin has to recover hard in the second half — management says it expects to offset nearly all of the tariff damage by year-end. Tariffs cost a net $220 million this year after mitigation, and Lululemon is not raising prices to recover that, because competition in athleisure is too intense; instead it is leaning on suppliers and cutting product lead times from 18–24 months to 12–14. New CEO Heidi O'Neill, a longtime Nike executive, starts in early September. Any IEEPA tariff refund — which the guidance explicitly excludes — is upside the market is not paying for.

The bear case deserves a plain airing, because it is strong: five quarters of falling Americas comps, rising discounting, product launches that missed, negative media commentary around a proxy contest with founder Chip Wilson and questions about product composition, and a new CEO who has not started. In that world, ten or eleven times earnings is not obviously a bargain — it may be fair for a shrunken brand. The condition that would prove the bears wrong is specific: Americas comps stop sliding, gross margin stops falling by the second half, and guidance survives one report uncut. The condition that proves them right is just as concrete — a third cut, or free cash flow that drops from its roughly $1.3 billion base.

September 3 is the first test, and the per-share beat — whichever way it lands — is the wrong number to read. The turn, when it comes, will show up in comps and margins first, and in a guidance number that finally stops moving down. I can be wrong again; brands in decline can surprise. But the disciplined read is that Lululemon is a genuine margin of safety without a proven proof point yet. Cheap and falling is not the same as cheap and turning — and this stock has not yet earned the second half of that sentence.