Why I bought Lululemon Athletica ($LULU) at $125

Reverse-DCF shows the market is pricing in a margin decline below the worst year in LULU's history. I'd take that bet.

May 13, 2026

LULU 0.00%↑ surfaced on my screener after another price drop this week. Mechanical valuation seems quite attractive.

Of course, relying on programmatic models is very risky, it’s just a starting point which requires careful adjustments and judgment calls1. What motivated me to dig deeper is the fact that part of the valuation compression seems to be about the narrative, like CEO controversy2, not about fundamentals.

Reverse-DCF of Lululemon: what does the price imply?

I am a big fan of the expectations investing framework: instead of projecting 10 years of cash flows, which is impossible by definition, we are just looking at a 10-year path which justifies the current price. The degree of plausibility of this path tells a lot about whether the company is fairly priced.

Here is one of the scenarios3 which fits the $125 price and 14.15B enterprise value:

You can see the full results and customize the output on the calculator page.

So what do we see here?

To justify the price the company needs to demonstrate a very moderate growth, gradually fading to the terminal 2.5%. The model allows both ROIC and EBIT margin to deteriorate quite significantly: from 28% to 9.5% and from 19% to 11.5%. Moreover, that’s under not-so-friendly other conditions: WACC 9.5% and minimum reinvestment 15% of NOPAT. If we ease WACC to 9% and reinvestment to 10%, the implied year-10 EBIT margin falls to 10%.

That doesn’t look like being priced for perfection. If all of them: low growth, sinking margins and falling ROIC are already baked in the price, there indeed might be an investment opportunity. It’s still too early to say that there is this opportunity. We need to assess the probabilities of different scenarios first.

Base case

Story: the business continues roughly on the current trajectory. Management doesn’t do anything revolutionary, but keeps financial discipline and executes the current strategy: more products in different categories. It means growing revenue but deteriorating margin (a wide selection of products competing with different brands naturally have lower margin than one iconic product). Growth in China and rest of the world continue to offset the decline in North America for several years.

Model assumptions: WACC 9%, terminal margin 14%, 5 years of growth on the last year pace, minimum 12% reinvestment.

Result: $18.09B enterprise value, $160 share price.

Calculator link.

Bull case

Story: the business partially mitigates the brand’s struggle and tariffs effects. Several moderately successful products in the new categories without too much CAPEX for new locations. North American margins are flat and improving in China. In 10 years margin still deteriorates, but only to the point of observed historical minimum.

Model assumptions: WACC 9%, terminal margin 16.4%, several years of high single-digit growth, minimum 10% reinvestment.

Result: $21.47B enterprise value, $191 share price.

Calculator link.

Bear case

Story: the business can’t sustain growth, pricing power declines. Despite high CAPEX spending, growth is only on terminal rate. China growth slows, so the offsetting effect on NA sales mostly vanishes.

Model assumptions: WACC 9.5%, terminal growth only starting now, 15% reinvestment floor, margin falls to 10%.

Result: $12.26B enterprise value, $108 share price.

Calculator link

Probabilities

That’s the hardest and the most interesting part.

First, about the bear case. It implies that several things happen simultaneously:

New products don’t bring growth.
China growth slows significantly.
All mitigation efforts on tariffs fail.

It doesn’t seem to be the case. Worldwide the brand shows growth after relatively weak December and January:

The new products demonstrate growing demand, while the iconic leggings decline:

That might indicate that the current strategy is actually correct: the demand for leggings would decline no matter what the company would do. It’s quite hard to milk one successful product indefinitely. So expanding into different product categories might be actually a solid, while less cool choice.

Anyway, I see no indication that all three things are here. At least growth is happening (though Q1 is likely to be weak). So the probability of the bear case looks relatively low. I assign 20%.

What we saw above is more consistent with the base case. I think 45% probability is appropriate here.

The bull case requires either tariff mitigation and flat North America sales, or stronger growth in China, or successful defense of margins. So there are several catalysts, each can give the market more optimism; they don’t have to happen simultaneously. That’s why I think bull case is more probable than bear. I assign 35% of probability.

So what are we getting after weighing the probabilities and the prices:

The potential upside satisfies my personal margin of safety requirement. So I bought at $125 yesterday (12.05.2026).

Please note that it’s neither a buy recommendation nor a forecast. I am just sharing my own investment process. LULU fits my investment horizon and risk appetite. Quite possible it doesn’t suit yours. Do your own research.

It is not a generic disclaimer. Investing in LULU at this stage means bearing significant risks.

What can go wrong?

First, a meaningful turnaround is unlikely till the end of 2027. The new CEO starts in September; she simply has no time to make significant changes in 2026. The activist fight will continue to spoil the narrative, there is no clear deadline to end it. The further repricing catalysts in the future, the higher the risk that they will not materialize at all.
While the bear case scenario is relatively mild (just $108 vs $125) it doesn’t mean at all that price can’t go any lower. $108 is derived from a smooth 10-year path. If margin drops to 15% next year, the market will immediately react with a severe sell-off.
I might understate the risks of margin decline. If mentioned above drop to 15% margin materializes not as a one-time hit, but a new reality (for example in case of quicker decline of the leggings popularity), then path to 10% margin becomes much shorter and the real bear case would be around $80. I didn’t model it in the DCF because now I don’t see concrete indications for this scenario for now.
In case of constantly deteriorated narrative (“apparel brand for millennials, which lost its relevance”) the market can just suppress multiples and even if the math is correct, the shareholders will wait ~10 years while FCF gives the appropriate return.
I already mentioned that Q1 is likely still weak. There is no strong indicator that margins are holding. Judging by Google Trends, February and March were quite soft. If the next quarterly report shows EPS miss and weak margins, the price can easily drop below $100. If it happens, I intend to add to my position, provided the fundamentals still imply today’s long-term picture.

Conclusion

I see LULU as temporarily undervalued because of the combination of:

Negative publicity and CEO controversy.
Natural deterioration of the iconic product’s popularity.
Transition to multi-category strategy which is generally a good decision, but hasn’t yet yielded solid results.
Tariffs hit.

I don’t see them as company-destroying problems. I believe that lululemon athletica becomes more mature, diversified, less “cool” company, which can still create a lot of value for long-term shareholders. I also like their buyback program4. Not only because it mechanically supports price, but because it forces management to be more disciplined in capital allocation. Another healthy sign of a maturing company.

In short: LULU is not an “obvious buy”. It’s a messy, out of favor stock. That’s why there is a possibility of asymmetric returns: they come with risk.

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