The $240M Hit Nobody Saw 😱

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THE $240 MILLION HIT NOBODY SAW 😱 

$LULU ( ▼ 1.47% ) just dropped earnings, and Wall Street’s acting like they showed up to yoga class in jeans. Stock’s been smacked down 20%+, but if you look past the noise… the fundamentals are still looking stretchy and strong.

Let’s walk through it.

The Numbers That Matter

• Revenue: $2.5B this quarter → +7% y/y. Missed Wall Street’s expectations by ~$40M, which isn’t that bad.

• Regional Breakdown:

  • Americas: up just 1% y/y (ouch). Comparable sales actually fell 4%.

  • International: up a spicy 22% y/y.

  • China: the MVP → +25% y/y, now makes up 15%+ of total sales.

• Stores: added 14 new shops → now rocking 780+ stores globally.

• Digital Sales: 39% of total revenue, +9% y/y.

• Margins:

  • Gross margin: 58.5% (down 110bps).

  • Operating margin: 20.7% (down 210bps).

  • What does it all mean? Tariffs + markdowns are eating into profits.

• EPS: $3.10 → beat estimates by $0.25.

• Cash vs. Debt: $1.15B cash, no long-term debt. LULU’s balance sheet is squeaky clean.

Guidance (aka The Mood Killer)

Management came in hot with the downer:

• Full-year revenue: $10.85B–$11.0B vs. Wall Street’s $11.18B.

• EPS: $12.77–$12.97 vs. Wall Street’s $14.45.

That’s where the panic set in. Tariff drama + U.S. slowdown = Wall Street tantrum.

The Tariff Headache

• LULU expects a $240M tariff hit to annual gross profit.

• De minimis exemption (the “duty-free under $800” loophole for imports) got yanked → hurting U.S. e-commerce.

• Inventory is up almost 20%, meaning discounts and markdowns are coming to clear it.

Potential upside? If the Supreme Court strikes down Trump-era tariffs, $LULU ( ▼ 1.47% ) gets all that margin pain back. Management isn’t banking on it (smart), but the ruling later this year could be a sneaky upside catalyst.

Growth Drivers (aka The Good Stuff)

• China: still a rocket ship. No tariff issues, better margins, booming e-commerce. Platforms like Tmall, Douyin (TikTok China), and WeChat are massive sales channels.

  • Fun fact: live-stream shopping in China is projected to hit $770B by 2030 (7.4% CAGR). LULU’s perfectly positioned to tap that.

• Mexico: LULU just took direct control of local retail ops. Expect growth here.

• Long-term history: nearly 20% CAGR in sales over the last decade. Even if that slows, it’s still one of the best in consumer apparel.

Valuation Check 🧮

Here’s where it gets interesting:

• Stock is now trading at <20x earnings. That’s bargain-bin compared to its history (used to be 70x PE at the peak).

• Free cash flow: still $1B+ annually, even after tariff hits.

• Efficiency/profitability metrics are superior to peers.

Valuation math:

• Conservative DCF → fair value at $186/share (modest upside).

• Peer comps → 66% upside.

Even a conservative valuation up to $186 leaves me with over a 16.7% upside. But the analysts on Wall Street are more optimistic than that. The average price target across analysts leaves Lulu with a 24.61% upside and a price target of $199.20. I might just round it up to $200….

Risks

• U.S. slowdown could linger.

• Fashion trends shift fast → LULU can’t afford to fall behind.

• Tariff overhang likely keeps near-term volatility high.

The Play

This isn’t a “back up the truck” moment… but it’s also not a “run for the hills” situation.

• Fundamentals = strong.

• Balance sheet = debt-free.

• International = booming.

• Valuation = attractive.

I think it’s a buy and personally starting with a small position. Short-term pain? Sure. Long-term? The risk/reward looks tilted in LULU’s favor.

TL;DR

• Revenues: $2.5B (+7% y/y), China crushing (+25%).

• Guidance cut: revenue $10.85–11.0B, EPS $12.77–12.97 → below Wall St.

• Tariffs = $240M hit + inventory up 20%.

• Balance sheet: $1.15B cash, zero debt.

• Stock trading <20x PE vs. historical 70x.

• DCF fair value: $186. Peer comps: 66% upside.

• Call: Buy, small starter position.