Why LULU Stock Deserves a Closer Look After Its Sharp Pullback

The Brand Moat Remains Intact

Lululemon Athletica has experienced significant headwinds recently, with shares declining sharply from their December 2023 peak. However, beneath the surface lies a business model built on enduring competitive advantages. The athletic apparel company has cultivated one of the most recognizable premium brands in the activewear space, commanding pricing power that translates directly into profitability.

The most compelling evidence of this strength appears in the company’s gross margins. During fiscal 2025’s second quarter (ended August 3), Lululemon achieved a remarkable 58.5% gross margin. This figure speaks volumes about the brand’s ability to maintain premium pricing despite competitive pressures. Few companies in the apparel industry can sustain such elevated margins without sacrificing volume or market position.

Valuation Disconnect Creates Opportunity

The market’s recent pessimism has created a striking disconnect between price and fundamentals. LULU currently trades at a P/E ratio of 11.2, a dramatic discount to the broader S&P 500’s multiple of 25.7. While slower revenue growth has weighed on sentiment, this valuation compression appears excessive given the company’s historical earnings trajectory.

Over the past five years, Lululemon’s net income has grown at a compound annual rate of 33.7%—a pace that reflects operational excellence and the strength of the LULU brand strategy. This earnings power, combined with current valuations, suggests the market may be overweighting near-term growth concerns at the expense of long-term value creation.

A Global Expansion Story Takes Shape

A significant growth driver that often gets overlooked is Lululemon’s international expansion, particularly in China. The company is still in the early phases of building market presence in this region, with substantial upside potential ahead. As LULU continues to build its footprint in higher-growth geographies, the earnings power demonstrated in mature markets should compound over time.

The combination of a fortress brand, industry-leading margins, and geographic expansion opportunities positions the company for meaningful value creation. While near-term volatility may persist, patient investors who recognize these fundamental strengths may find attractive entry points at current price levels.