Is Lululemon (LULU) a Buy Now Amid Mixed Earnings Signals and Strategic Shifts?

Lululemon Athletica (LULU) has long been a darling of the premium activewear market, but recent developments have sparked debate about its investment potential. With mixed signals from its Q3 2025 earnings, valuation discounts, and evolving strategic priorities, investors must weigh near-term challenges against long-term opportunities. This analysis evaluates whether Lululemon remains a compelling buy, focusing on its earnings momentum, valuation attractiveness, and execution risks.

Near-Term Earnings Momentum: Strong International Growth, Weak Domestic Demand

Lululemon's Q3 2025 results highlighted a stark regional divide. Total revenue rose 7% year-over-year to $2.6 billion, driven by 46% growth in China Mainland and 19% expansion in the Rest of World segment in constant currency. The digital channel accounted for 42% of total revenue ($1.1 billion), underscoring the brand's e-commerce strength. However, the Americas segment contracted by 2%, with the U.S. down 3% and Canada down 1% according to Q3 earnings. This domestic softness reflects broader challenges in the U.S. activewear market, where demand has slowed amid macroeconomic pressures and shifting consumer preferences.

Gross profit margin also declined by 290 basis points to 55.6% of net revenue, primarily due to higher tariffs and the removal of the de minimis provision. While these headwinds are largely external, they highlight the vulnerability of Lululemon's margins to global trade dynamics. The company's Q4 revenue guidance of $3.5–$3.59 billion and full-year 2025 EPS guidance of $12.92–$13.02 suggest cautious optimism, but investors must monitor whether these forecasts account for ongoing margin pressures.

Valuation Reset: A Compelling Discount or a Warning Signal?

Lululemon's valuation has undergone a dramatic reset in late 2025. Its forward P/E ratio now stands at 11.4–12.37, significantly below its historical average of 30 and far lower than peers like Nike (34.27) and Deckers (11.92). This discount reflects investor concerns over U.S. demand softness, inconsistent product execution, and margin pressures according to market analysis. However, the valuation reset also creates an opportunity for long-term investors, as Lululemon's core fundamentals remain robust: 58.5% gross margins, high customer retention rates, and double-digit international growth.

The company's PEG ratio of 0.42-calculated by dividing its forward P/E (11.58) by its 5-year EBITDA growth rate of 27.6%-further underscores its undervaluation relative to growth prospects. This metric ranks Lululemon better than 89.8% of its industry peers, suggesting it is trading at a discount to its intrinsic value according to financial analysis. In contrast, Nike's PEG ratio of 23.27 and a forward P/E of 34.27 indicate it is overvalued relative to its growth trajectory according to investor research. For value-oriented investors, Lululemon's valuation appears attractive, provided the company can stabilize U.S. demand and navigate margin pressures.

Long-Term Strategic Execution: Balancing Ambition and Realism

Lululemon's long-term strategy, encapsulated in its Power of Three x2 plan, focuses on international expansion, men's growth, and digital engagement. The company's international momentum-particularly in China and Europe-provides a clear runway for future growth. Strategic partnerships, such as its NFL collaboration and forays into footwear and sports apparel, also signal a diversification of its product portfolio.

However, execution risks persist. The U.S. market's decline raises questions about Lululemon's ability to maintain its premium positioning in a saturated activewear landscape. Additionally, the company has had to adjust its sustainability targets, including dropping its 2025 goal for reducing single-use plastic intensity. While partnerships with Samsara Eco and ZymoChem aim to advance recycled materials and plant-based nylons, scaling these innovations remains a challenge.

The "Like New" circular initiative, now operating in 84% of North American stores, is a positive step toward sustainability and customer retention. However, the program's global expansion by 2030 will require significant investment and operational execution according to industry analysis. Investors must assess whether Lululemon's leadership transition-with CEO Calvin McDonald stepping down-will accelerate or disrupt these strategic priorities.

Peer Comparison: A Tale of Two Valuations

Lululemon's valuation discount becomes even more pronounced when compared to peers. Nike's forward P/E of 34.27 and PEG ratio of 23.27 suggest it is overvalued relative to its growth prospects, particularly given its 1.4% five-year EBITDA growth rate according to financial reporting. Deckers, with a P/E of 11.92 and PEG of 0.73, appears more reasonably valued but lacks Lululemon's international growth potential according to market data.

Lululemon's combination of low valuation, high gross margins, and international expansion positions it as a more compelling long-term play, assuming it can stabilize U.S. demand and execute its product diversification strategy. The key differentiator is its ability to balance premium pricing with cost pressures, a challenge shared by all activewear players but one where Lululemon's brand loyalty and customer retention rates offer a distinct advantage.

Conclusion: A Buy for Long-Term Investors, With Caution

Lululemon's current valuation discount, driven by near-term headwinds, presents an attractive entry point for long-term investors who believe in its strategic vision. The company's strong international growth, high gross margins, and innovative product diversification efforts justify optimism. However, risks remain: U.S. demand must stabilize, margin pressures from tariffs must be mitigated, and leadership transitions must not disrupt execution.

For investors with a 3–5 year horizon, Lululemon's undervalued stock and robust long-term growth drivers make it a buy, albeit with caution. The key will be monitoring Q4 results and the company's ability to adapt its product and pricing strategies in a challenging macroeconomic environment.