Lululemon: cheap at 10x earnings, but the decline is still accelerating

Lululemon is now the kind of stock that tempts a bargain hunter. After an 18% drop on September 3, the shares trade around $100 — near their lowest in roughly eight years and about 80% below the $511 peak they touched in December 2023. At that price, the stock runs at roughly 10 times the earnings the company still expects to earn this year, or close to eight times trailing profit. A profitable, minimal-debt retailer selling at single-digit earnings multiples is undeniably cheap.

The discipline that keeps that temptation honest is asking whether the multiple has reset faster than the business has actually deteriorated. Here the answer is the problem: the decline is still accelerating, not leveling off. Lululemon cut its full-year guidance again on September 3 — the third such cut in fiscal 2026 — and each cut has followed a quarter where it beat on profit but missed on sales. The market isn't pricing in a recovery; it's pricing in a business that keeps getting worse, and so far the company keeps confirming it.

What the numbers show

The latest quarter laid the deterioration bare. Second-quarter revenue fell about 4% to $2.42 billion, and the weakness is concentrated in North America, its largest market, where comparable sales fell 12%. The company blamed "negative commentary in the media and social channels" for hurting traffic and blunting the response to new products, while pointing at rivals Alo and Vuori taking market share.

The guidance, not the beat, is what matters. Lululemon now expects fiscal 2026 revenue of $10.35 billion to $10.5 billion — a decline of 5% to 7% — and earnings per share of $9.48 to $9.73, down from the $10.95 to $11.15 range it guided to in June. It also told investors the next quarter will be worse: third-quarter revenue is expected to fall 10% to 11%. A business guiding to an accelerating decline is not showing signs of stabilizing near its bottom; it is still finding the bottom.

The catalyst clock, and the honest read

The one reason a share price at 10 times earnings could be early rather than wrong is the leadership change. Former Nike executive Heidi O'Neill takes over as CEO on September 8, inheriting a company that has been through a founder-led proxy fight, the January departure of CEO Calvin McDonald, and a turnaround plan that has yet to show results in the numbers. She is the closest thing to a near-term catalyst the stock has. But a new CEO is a person, not proof; an incoming chief executive does not change same-store sales, and there is no dated evidence that demand has bottomed.

That is why this reads as too early rather than a clean buy or a clean avoid. On the one hand, the stock is not expensive on any earnings basis and the balance sheet is strong — about $1.4 billion in cash with no meaningful net debt, a roughly 56% gross margin, and over $1 billion in trailing free cash flow. This is not a solvency story, and the price already discounts a great deal of bad news; at least a dozen brokerages cut price targets after the report, and Piper Sandler's lowest sits at $80, below the current price.

On the other hand, a cheap multiple is only protective when the business stops deteriorating. The valuation reset has been enormous, but the operating reset has not arrived: comparable sales are accelerating downward, and the company itself guided the next quarter lower. The honest test for anyone watching is a single, identifiable proof point — a quarter, likely under O'Neill, where North America comparable sales stop getting worse. Until that appears in reported numbers rather than in a CEO's promises, the discount is a statement about how far the stock has fallen, not evidence that the fall is over.