Down 68%, This Growth Stock Looks Oversold. Is It a Buy?

Key Points
Lululemon beat fourth-quarter estimates, but came up short with its guidance.
The stock now trades at a forward P/E of 14.
The company is refreshing its board, adding former Levi's CEO Chip Bergh.
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In the span of two years, Lululemon Athletica (NASDAQ: LULU) has gone from being a top performer in the apparel sector to one of the worst.
The stock is now down 68% from its peak at the end of 2023 as its growth has slowed dramatically. There's no single factor that is responsible for that pullback, but rather, there have been a number of causes. The company is facing increasing competition as the athleisure market appears to be getting commoditized. By its own admission, it hasn't done enough to keep its styles fresh. Discretionary spending has been weak in the U.S. due to a slugglish labor market and stubborn inflation, and Lululemon has been hammered by tariffs, especially the removal of the de minimis exemption, which forced it to rearrange its distribution network to fulfill e-commerce orders in the U.S. Those issues led to the departure of former CEO Calvin McDonald, and the company is still in the process of finding a permanent CEO. Founder Chip Wilson is also waging a proxy battle, signaling his frustration with management, and, to his delight, Lululemon named former Levi's CEO Chip Bergh to its board yesterday as well.
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Despite those challenges, the stock looks like it may have just bottomed out.
On Tuesday night, Lululemon reported fourth-quarter earnings that edged past analyst expectations, but its 2026 guidance was disappointing. The stock was actually down after hours on the report, but then jumped during the regular trading session, and closed up 3.8% on Wednesday, a sign that investors may believe that the stock is too cheap to ignore.
What Lululemon's Q4 report told us
The fourth-quarter report showed that Lululemon's problems remain. Revenue rose just 1%, or 6% excluding the extra week in 2024, to $3.64 billion, beating estimates of $3.58 billion.
Comparable sales rose 3%, but declined again in the key Americas segment, falling 3%. International sales remained robust with comps up 20%, driven by a strong performance in China.
Profit margins shrank primarily due to tariffs, which had a 520-basis-point impact on gross margin. Overall gross margin fell from 60.4% to 54.9%, and as a result, operating profit dropped 22% to $812.3 million. Earnings per share declined from $6.14 to $5.01, which topped the consensus at $4.77.
Guidance for 2026 shows that the retailer expects its challenges to continue, as it called for revenue of $11.35 billion-$11.5 billion, up from $11.1 billion in 2025 but below estimates of $11.52 billion.
Its bottom-line forecast wasn't very encouraging either as the company sees earnings per share of $12.10-$12.30, which is down from the $13.26 it made in 2025 and worse than the consensus at $12.56. Its forecast for the first quarter was also below estimates.
The guidance implies that Luluemon's guidance will continue to compress in 2026, and, indeed, the company forecasts a 120 basis point decline in gross margin due to deleverage on fixed costs, and investment in new store openings and its distribution center. Management also said tariffs would have a headwind of 90 basis points, but it expected to offset nearly all of it.
Is Lululemon a buy?
Despite the disappointing guidance, there is potential here for a turnaround. Management said that in North America, it has seen a good response to new product launches and a higher percentage of full-price sales, which is key to the company restoring its strong margins.
Additionally, international growth remains strong and shows that the brand still has cachet. The company expects revenue in China to increase 25%-30%, and for rest-of-world revenue to be up in the mid-teens. There are also other potential tailwinds in the company's favor, like the naming of a new CEO, and the easing of tariffs or the reinstatement of the de minimis exemption, though that may not happen until President Trump is out of office.
Based on its forward guidance, Lululemon trades at a price-to-earnings ratio of less than 14. While the company is certainly challenged, there's enough positives here for it to put together a turnaround, including its strength outside of North America and better performance of new styles, and makes the risk/reward favorable here. Opening a small position in the stock seems reasonable right now.
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Jeremy Bowman has positions in Lululemon Athletica Inc. The Motley Fool has positions in and recommends Lululemon Athletica Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.