Lululemon (LULU)

Athletic apparel retailer Lululemon (NASDAQ:LULU) fell short of the market’s revenue expectations in Q2 CY2025, but sales rose 6.5% year on year to $2.53 billion. Next quarter’s revenue guidance of $2.49 billion underwhelmed, coming in 2.7% below analysts’ estimates. Its GAAP profit of $3.10 per share was 8.7% above analysts’ consensus estimates.

Company Overview

Originally serving yogis and hockey players, Lululemon (NASDAQ:LULU) is a designer, distributor, and retailer of athletic apparel for men and women.

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Competitors in the athletic apparel industry include Nike (NYSE:NKE), Under Armour (NYSE:UA), and Columbia Sportswear (NASDAQ:COLM).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $10.9 billion in revenue over the past 12 months, Lululemon is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, Lululemon’s 20.4% annualized revenue growth over the last six years (we compare to 2019 to normalize for COVID-19 impacts) was exceptional as it opened new stores and increased sales at existing, established locations.

This quarter, Lululemon’s revenue grew by 6.5% year on year to $2.53 billion, missing Wall Street’s estimates. Company management is currently guiding for a 3.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.2% over the next 12 months, a deceleration versus the last six years. We still think its growth trajectory is attractive given its scale and suggests the market is baking in success for its products.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Lululemon sported 784 locations in the latest quarter. Over the last two years, it has opened new stores at a rapid clip by averaging 8.4% annual growth, among the fastest in the consumer retail sector. This gives it a chance to become a large, scaled business over time.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Lululemon has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 5.3%. This performance suggests its rollout of new stores is beneficial for shareholders. We like this backdrop because it gives Lululemon multiple ways to win: revenue growth can come from new stores, e-commerce, or increased foot traffic and higher sales per customer at existing locations.

In the latest quarter, Lululemon’s same-store sales rose 1% year on year. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Lululemon can reaccelerate growth.

Lululemon has best-in-class unit economics for a retailer, enabling it to invest in areas such as marketing and talent. As you can see below, it averaged an elite 58.8% gross margin over the last two years. That means Lululemon only paid its suppliers $41.17 for every $100 in revenue.

Lululemon produced a 58.5% gross profit margin in Q2, down 1.1 percentage points year on year but still exceeding analysts’ estimates by 1.6%. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

Lululemon’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 22.6% over the last two years. This profitability was elite for a consumer retail business thanks to its efficient cost structure and economies of scale. This is seen in its fast historical revenue growth and healthy gross margin, which is why we look at all three data points together.

Analyzing the trend in its profitability, Lululemon’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q2, Lululemon generated an operating margin profit margin of 20.7%, down 2 percentage points year on year. Since Lululemon’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Lululemon has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the consumer retail sector, averaging 14.8% over the last two years.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Lululemon’s five-year average ROIC was 47.9%, placing it among the best consumer retail companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Lululemon reported $1.16 billion of cash and $1.76 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.98 billion of EBITDA over the last 12 months, we view Lululemon’s 0.2× net-debt-to-EBITDA ratio as safe. We also see its $0 of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Lululemon beat analysts’ gross margin expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its full-year EPS guidance missed and its EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 12.9% to $179.50 immediately after reporting.

Updated: November 25, 2025 at 9:11 PM EST

Are you wondering whether to buy Lululemon or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

There are multiple reasons why we think Lululemon is an elite consumer retail company. First of all, the company’s revenue growth was good over the last three years. And while its projected EPS for the next year is lacking, its marvelous same-store sales growth is on another level. On top of that, Lululemon’s new store openings have increased its brand equity.

Lululemon’s P/E ratio based on the next 12 months is 13.9x. Looking at the consumer retail space today, Lululemon’s qualities as one of the best businesses really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $193.54 on the company (compared to the current share price of $178.80), implying they see 8.2% upside in buying Lululemon in the short term.