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THE HEADLINE
Lululemon’s Quarterly Results Scoreboard, Offside Capital
Is the market right to punish Lululemon (LULU) by over 18%?
Absolutely.
Is the stock now fairly priced because of it?
Easiest “no” I’ve seen since the depressed software opportunities came across my desk.
The reason for the selloff is pretty simple:
It wasn’t the numbers, it was the guidance
And if you read my original LULU thesis, you know that worsening expectations were already a big part of what made the stock an interesting buy in the first place last quarter.
Naturally, this sounds like a dip-buying opportunity…
Except there’s a catch, as with all market opportunities that seem “too easy.”
At these levels, the market may already be pricing in (or overpricing) a much weaker business.
What you and I need to figure out is whether the turnaround thesis itself has actually changed.
Because there is one metric in this quarter that matters more to me than headline revenue, EPS, or even tariff guidance.
And it looks even better than it did last quarter.
So today we’re going back through the original thesis, the new numbers, and checking whether new market expectations seem reasonable or an opportunity to revisit LULU as a buy.
Let’s get into it.
Did Lululemon’s earnings break my thesis?
EXPECTATIONS CHECK
Lululemon Price-Implied DCF, Offside Capital
The Offside investment philosophy begins with expectations, since thinking I am smarter than the market’s overall opinion would have cut my career short a long time ago.
“What must be true for today’s price to hold?”
That’s the first question we ask in any investment.
For Lululemon’s ~$100 to hold, the following must be true:
A 2.7% continuous revenue decline over the next decade
Constant 18% EBIT margins, while the quarter delivered 18.8%
A 30% tax rate during an international sales haul, creating a much lower tax rate
Yes, the product quality suffered after the tariff inventory overshoot I mentioned in the original thesis.
Yes, the company’s revenue growth suffered because of it.
No, I don’t think we’ll continue to see 2.7% revenue declines for the next decade.
Especially when international sales now make up over a third of U.S. sales and continue to grow at nearly 4x the pace.
If an ounce of you thinks these market expectations will realize…
Then close this email right now.
But,
If part of you says “these expectations are now easier to beat on a demand whiff”
Then stay, because this is exactly the sort of setup that leads to double-digit returns.
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