Image source: Britvic (copyright Evan Doherty)
Billionaire investor Warren Buffett came to my mind this week. His approach of being fearful when others are greedy and greedy when others are fearful was specifically what I thought about, as I added a share back into my Self-Invested Personal Pension (SIPP) after selling it years ago.
That share was sportswear retailer Lululemon Athletica (NASDAQ: LULU). Investors seemed to be fearful after the company issued a profit warning last week.
The Lululemon share price fell sharply after that and is now 57% lower than at the start of 2025. To me, that looks like it might turn out to be a terrific bargain over the long term.
Not for the impatient
At face value, the current valuation looks cheap. The price-to-earnings ratio is just 11, for a company with a loyal fanbase and impressive pricing power. Last year, for example, Lululemon’s net profit margin was 17%.
But the prospective price-to-earnings ratio is likely well above 11, as the company’s earnings look set to fall.
The retailer has seen enthusiasm among its key North American customer base fall. Comparable sales in the Americas for the second quarter fell 4%. Lululemon also announced an expected $240m hit to full-year gross profit due to US tariff and import rule changes, even after taking actions like raising prices and pushing manufacturers for lower costs.
With the US economy looking fairly weak, consumers might delay splashing out on its pricy core yoga gear. One fear a lot of investors seem to have is that things may get worse at Lululemon before they get better.
Profit warnings sometimes follow one another in fairly rapid succession (UK-based sportswear retailer JD Sports has demonstrated that over the past couple of years).
I see a potential opportunity
I accept that, as I am a believer in long-term investing. But I decided to add Lululemon shares to my SIPP because of its long-term business model and short-term management actions.
Management’s response to the disappointing second results had candour. The company recognises that it has been lacking sufficient newness is some of its product ranges in North America and plans to fix that.
That sounds simple but could already go a long way to stemming the revenue decline in the Americas, in my opinion.
What really excites me about Lululemon though, is not the immediate fixes but the longer-term growth story.
Strong international sales momentum
While comparable sales in the Americas fell in the second quarter compared to the prior year period, net revenue for that region actually inched up as Lululemon has been opening stores.
Meanwhile, international net revenue grew by more than a fifth year-on-year. While Americans may be showing some signs of fatigue, international consumers clearly still cannot get enough of Lululemon.
The company has a strong brand, limited large-scale competition with a yoga focus, proven business model and strong economics. It remains solidly profitable despite the profit warning and is sitting on over $1bn of cash and cash equivalents.
In coming months and perhaps years, Lululemon shares may move even lower. Over the long term though, I am optimistic the growth story combined with current share price make this a smart buy for my SIPP.
