Lululemon Looks Cheap at 8x Earnings. The Refund-Boosted Numbers Say Otherwise.

Two of the market's most recognizable investors stared at the same Lululemon quarter and reached opposite verdicts six days apart. On September 4, Michael Burry called the stock a "fat pitch" below $100 and said he planned to buy more. On September 10, Jim Cramer said the opposite: "I can't give you a good reason to buy Lululemon even after these stunning declines" describing it as "bleeding out in no man's land."

Lululemon had already fallen more than 80% from its December 2023 high, dropping below $100 for the first time in over eight years. At roughly $99 the stock trades at about eight times trailing earnings — a multiple that usually screams value. So which read is closer: a famous value investor betting the brand recovers over decades, or a famous TV host who cannot find a reason to touch a beaten-down stock?

The gap between them starts with a number the headlines flattered. Lululemon reported $2.92 in earnings per share for its fiscal second quarter versus roughly $1.79 expected — a huge beat. But nearly all of that gap carried a one-time label. The quarter included $134.5 million in tariff refunds plus related interest, worth about 86 cents per share and roughly 5.6 percentage points of gross margin. Raw revenue actually came in below expectations, and comparable sales fell 9% globally, dragging an 8% decline in the company's largest region, the Americas, down to a 12% same-store slide. The "$2.92 beat" was, in substance, a refunded miss.

The "Cheap" P/E Is Part Illusion

This is the heart of the confusion, and the reason a low multiple is not proof of a bargain. A price-to-earnings ratio only signals cheap when the E is stable or growing. When earnings are falling, a low P/E is a moving target: the ratio quietly re-rates higher as next year's profit comes in lower. That is exactly the trend Lululemon just disclosed.

The company cut full-year guidance sharply, to revenue of $10.35 billion to $10.50 billion (down 5% to 7%) and earnings per share of $9.48 to $9.73 — and that revised EPS still includes the refund benefit. It guided third-quarter earnings to just 93 to 98 cents a share, down from $2.87 a year earlier. Cramer, to his credit, spotted the trap and named it: chasing the low multiple is a "sucker's game", he argued, because the company "keeps cutting numbers."

Do the arithmetic honestly and the cheapness thins. At $99, the stock is about 10 times the midpoint of its lowered full-year forecast — against a number the company itself is guiding down. A falling E plus an ordinary-looking P/E is the classic shape of a value trap, not a discount.

The Moat, Under the Same Stress

My rule of thumb is that a contrarian call must survive three tests — fundamental quality, valuation versus growth, and moat durability — and that a cheap price is a conclusion, not a starting point. Here the tests are failing. Growth has not just slowed to market rate; comparable sales have turned negative in every region at once, even as revenue in China and international markets still rose 4%. Comparable sales fell in the Americas, in China, and internationally, and management flagged a "greater-than-expected" slowdown in the core leggings category, negative social-media commentary, and China same-store sales "well below" expectations. The company has also operated for roughly eight months under interim leadership after CEO Calvin McDonald's exit in January, with founder Chip Wilson publicly criticizing the direction, before incoming CEO Heidi O'Neill takes over. When Cramer says he has seen nothing to make him feel better about the competitive environment — naming Alo Yoga and Vuori crowding the athleisure market — that is a moat under real strain, not a narrative.

This matters for what I would normally recommend. In the setup I hunt for, a high-growth business trades at a forward multiple that has collapsed to near-market levels while revenue still grows at a multiple of the market; there the burden of proof shifts to the bears. Lululemon is the mirror image. The multiple is collapsed, but the growth has turned negative, so the burden of proof sits with the bulls, and the guidance keeps moving the wrong way. On the current evidence, the market's pessimism is earned, not a misread.

What Would Turn This Into a Bargain

That is not the whole story, and Burry is not naive. Lululemon ended the quarter with roughly $1.4 billion in cash and no financial debt, generates meaningful free cash flow, and has been returning cash through buybacks. At a price-to-sales ratio under 1, the shares already price in a long run of bad news. There is a real asymmetry here: on the downside you are betting against a strong balance sheet, which is why Cramer himself called it "too risky to short"; on the upside, any sign of stabilization would re-rate a stock this cheap, violently.

So both famous readings are defensible on their own time horizons — Burry modeling decades of brand recovery, Cramer answering what the next quarter's numbers say. The fact that reconciles them is whether same-store sales stop falling. Burry calls the incoming CEO's lowered bar a clean slate to build on; Cramer says a reset is "not good enough." Until the new leadership produces evidence of an inflection — sales stabilizing in the Americas, a concrete product and marketing plan, China recovering — the numbers support Cramer's caution, not the "fat pitch."

I would not buy this stock today on the current evidence, and I would not short it either. The honest posture is a watch with one precise trigger: a quarter where Lululemon's comparable sales stop declining. That, not the P/E, is the number that separates a value trap from a genuine bottom — and the market will only stop being right about this stock when that number changes.