David Butler, The Motley Fool
4 min read
In This Article:
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The athletic apparel company cut its earnings per share guidance for the year by $0.37 to a range of $14.58 and $14.78.
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Tariffs will impact Lululemon's costs.
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U.S. consumers appear to be growing more cautious about discretionary spending.
Lululemon (NASDAQ: LULU) shares dropped roughly 20% in value last week after the company delivered an earnings report that included less enthusiastic earnings expectations for the year. While its revenues are still expected to be relatively in line with previous guidance, the added costs that tariffs will impose led management to dial back earnings estimates, causing the market to hit the stock pretty hard.
To be fair, Lululemon has historically been a fairly expensive stock, and companies need to produce solid results if they want to sustain higher valuations.
Arguably the biggest factor impacting Lululemon shares right now is the guidance cut. Yes, the apparel retailer beat estimates for the first quarter, but management nonetheless reduced earnings per share (EPS) expectations for the year to a range of $14.58 to $14.78 compared to previous guidance of $14.95 to $15.15.
As with most things these days, the weaker outlook is largely due to President Donald Trump's tariffs. Clothing companies like Lululemon largely hire overseas subcontractors to do the manufacturing of their clothes, which puts them in the crosshairs of Trump's policies. When I wrote about Lululemon in April, I noted that the tariffs Trump was imposing on Vietnam would impact 40% of Lululemon's production. Though those new taxes are currently paused, the president set the tariff rate on imports from that country at 46%.
Despite a 7% increase in revenue, Lululemon's earnings fell year over year in its fiscal 2025 first quarter. For the period, which ended May 4, net income was $314 million compared to $321 million a year earlier; a lower overall share count was responsible for its EPS growth. According to CNBC, comp sales increased a mere 1% compared to Wall Street's expectations for a 3% increase.
From what I can see, Lululemon has two main problems. Its costs of production will rise due to tariffs while the premium prices it charges for its goods could be putting a damper on its sales, especially in the United States, where recent Commerce Department reports have shown weak consumer spending growth.
One positive that can be pointed out for the stock is its now-lower valuation. According to fullratio.com, Lululemon has historically averaged a P/E ratio of around 42. After the stock's latest pullback, investors can pick up shares for a mere 17 times earnings. Based on the low end of the company's new guidance for 2025, the stock is trading at roughly 18 times forward earnings. But are these valuations low enough to make the stock a buy?
