Lululemon (LULU)

Athletic apparel retailer Lululemon (NASDAQ:LULU) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 7.3% year on year to $2.37 billion. On the other hand, next quarter’s revenue guidance of $2.55 billion was less impressive, coming in 0.7% below analysts’ estimates. Its GAAP profit of $2.60 per share was in line with 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).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $10.75 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 grew its sales at an exceptional 21% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new stores and increased sales at existing, established locations.

This quarter, Lululemon grew its revenue by 7.3% year on year, and its $2.37 billion of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 7.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.3% 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 sees success for its products.

Number of Stores

A retailer’s store count often determines how much revenue it can generate.

Lululemon sported 770 locations in the latest quarter. Over the last two years, it has opened new stores at a rapid clip by averaging 8.8% 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

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

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 6.6%. 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 58.9% gross margin over the last two years. That means for every $100 in revenue, only $41.14 went towards paying for inventory, transportation, and distribution.

In Q1, Lululemon produced a 58.3% gross profit margin, in line with the same quarter last year and exceeding analysts’ estimates by 1.1%. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Lululemon has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer retail business, boasting an average operating margin of 22.7%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Lululemon’s operating margin rose by 1.3 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Lululemon generated an operating margin profit margin of 18.5%, down 1.1 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.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 18.2% 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 47.7%, 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 $1.33 billion of cash and $1.71 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 0.1× 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 good to see Lululemon narrowly top analysts’ gross margin expectations this quarter. On the other hand, its EPS guidance for next quarter missed and its full-year EPS guidance fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 15.8% to $278.02 immediately after reporting.

Updated: July 9, 2025 at 11:10 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Lululemon, you should also grasp the company’s longer-term business quality and valuation.

Lululemon is one of the best consumer retail companies out there. For starters, its revenue growth was exceptional over the last six years. On top of that, its marvelous same-store sales growth is on another level, and its new store openings have increased its brand equity.

Lululemon’s P/E ratio based on the next 12 months is 15.6x. Scanning the consumer retail landscape today, Lululemon’s fundamentals clearly illustrate that it’s an elite business, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $300.87 on the company (compared to the current share price of $235.75), implying they see 27.6% upside in buying Lululemon in the short term.