Lululemon 🍋 Q2 Thesis Review
Ugly... the only fair thing to say about the recent performance of Lululemon.
I started buying Lululemon shares in June 2025, with the bulk of my position being built from November 2025 to June 2026 with my largest purchases being around $118 (interestingly also where lulu was buying back shares).
The story hasn't much changed, since then more just played out as the market had anticipated. Revenue continues to decline, we are seeing slight margin compression, and the managment team continues to cut guidance.
My reviewed perception of Lululemon is a split tale of two stories.
Story #1 📔
A company with a product offering that isn't resonating with customers, and weakening public sentiment due to detrimental advertising efforts. North American markets are not resonating with the products, and I don't anticipate the "Big Ass Bag" will likely improve that.
Managment on the Q2 earnings call insists that the issues are with marketing, and that they aren't reaching the audience that they need to.
Story #2 📘
Lululemon is not a failing business, backed by a fortified balance sheet and robust financials. Despite revenue declines, the company still produces significant cashflows and is a money machine.
At a $11.3billion market cap (around $10billion if you don't include the $1.4billion in cash on the balance sheet), the company still generates around $1.2billion in free cashflow (let's round and consider that a 10% cash yiled), and continues to operate with zero debt. ROIC remains durable at a +30%, and the book value is growing at 20% per year.
The story the market is leaning on is the recent revenue declines. I don't want to ignore this because I agree it's alarming and obviously not what we want to see the business doing. The interim leadership duo has done nothing but flounder, and if they were to remain at the helm I wouldn't see any hope of a narrative change.
However, there is a silver lining. Heidi O'Neal will be joining the team this week. She has a massive battle ahead of her, but may be the change that the company desperately needs.
Despite the current managment believing that marketing is the resounding weakness within the business, it's been obvious to everyone else that product newness, creativity, and uniqueness have been the culprit. This was the main point of contention with founder Chip Wilson who fought to get new creative minded board members their seats.
Heidi O'Neal's history at Nike was responsible for product creativity, consumer strategy, and brand which are all things that Lulu needs to focus on to turn around. She has a successful background in driving new products efficiently to market and engaging with customers effectively.
One quote I often go back to is "We want to buy a business an idiot could run, because one day an idiot will run it" from Charlie Munger. Lululemon has been horrendously mismanaged, and I firmly believe that they are on the brink of their turning point.
Managment (despite me saying has been incompetent) has suggested that they expect the business to be nearing its trough.
So, has my opinions or thesis changed at all on the business? No, not really.
I don't have any expectations of relief until the back half of 2027, and if shares continue to trade down then so be it.
I have no requirement or desire to try to compete or perform on a quarterly basis, but rather over the long term. I still see substantial fundamental value within this company.
In the short term, it may continue to decline, and I'm sure I'll continue to be ridiculed, but that honestly doesn't bother me at all.
I believe an inflection is coming, and patience will be rewarded. As active money movers flee the company, the patient sit calmly and build their positions.
