Key Moments
- Morgan Stanley maintains an Underweight rating on Lululemon Athletica Inc (LULU), framing its bearish stance around the timing and impact of a “shrink to grow” reset under incoming CEO O’Neill.
- EPS estimates for Lululemon have been cut by 33.43% over the past 90 days and 40.49% over the past year, while consensus still projects FY2027 EPS of $10.93 on $11.05B in revenue.
- Despite strengths such as 25% constant-currency growth in China, a $1B+ cash position, and zero debt, Morgan Stanley argues that the earnings outlook remains too optimistic and that near-term upside is unlikely.
Timing, Not Just Fundamentals, Drives the Bearish View
Morgan Stanley’s Underweight rating on Lululemon is rooted in the belief that the company is heading into a drawn-out reset period under incoming CEO O’Neill, rather than a quick operational turnaround. The firm characterizes this as a “shrink to grow” strategy that is likely to weigh on earnings over multiple quarters.
With Lululemon Athletica Inc (LULU) trading at $122.78 and EPS forecasts having been reduced by 40% over the last year, the market has already absorbed a significant amount of bad news. Even so, Morgan Stanley contends that consensus expectations for growth through FY2027 are still too aggressive.
Morgan Stanley’s Core Thesis: Reset Will Take Time
The latest note from Morgan Stanley centers on the idea that investors may be misjudging the timing and magnitude of the coming transition. The firm outlines three main elements:
- Limited impact from Q2 results – Morgan Stanley expects that upcoming second-quarter earnings will not be a major share price catalyst, as softness in the Americas is already widely recognized by the market. In their view, this reduces the likelihood of a meaningful upside or downside surprise from that specific report.
- O’Neill’s reset as the true inflection point – The incoming CEO’s strategic redesign is seen as the key driver for the equity story. Morgan Stanley’s Underweight rating assumes that this plan will involve deliberate near-term pressure on results, including a smaller store base, lower discounting, and a recalibration of the product assortment before any growth reacceleration can occur.
- Promotions as a symptom, not the core issue – According to the note, discounting should be viewed as a byproduct of deeper problems in product innovation, marketing efficiency, and store-level productivity. In this framework, promotional activity is evidence of underlying challenges rather than the primary issue to be fixed.
Earnings Revisions Underscore Pressure Into FY2027
Recent estimate cuts reflect the severity of the current reset narrative around Lululemon. Over both the 90-day and 1-year horizons, consensus earnings and revenue expectations have been revised sharply lower.
| Metric | 90-Day Revision | 1-Year Revision |
|---|---|---|
| EPS Estimates | -33.43% | -40.49% |
| Revenue Estimates | -5.32% | -7.87% |
Despite this reset, consensus still points to FY2027 EPS of $10.93 on revenue of $11.05B, implying a largely flat year-over-year profile. Morgan Stanley argues that such stabilization may be too optimistic if Lululemon fully embraces a “shrink to grow” framework involving fewer locations, reduced discounting, and a meaningful overhaul of its product lineup. In their view, this kind of strategy requires time to execute and is unlikely to produce immediate earnings stability.
Strengths Highlighted Amid the Bear Case
While Morgan Stanley’s overall stance is cautious, the firm’s SWOT analysis acknowledges several notable positives within Lululemon’s current setup:
- China as a key growth engine – The business in China is described as growing 25% in constant currency, providing an important area of momentum.
- Solid balance sheet – Lululemon holds more than $1B in cash and has no debt, a combination that offers flexibility to manage through a transition phase.
- Valuation at a historically low multiple – The stock is trading at a price-to-earnings ratio of approximately 9.5x, which the note characterizes as historically inexpensive for a globally recognized brand.
Even so, Morgan Stanley emphasizes that an attractive headline multiple does not necessarily signal a bottom when earnings estimates are still being revised lower. In their framework, the risk lies in the “denominator” continuing to decline.
Market Setup and Key Metrics to Monitor
Lululemon’s share price performance and forward expectations reflect the depth of the current reset narrative.
| Item | Detail |
|---|---|
| Share price | $122.78 |
| Change from 52-week high | Down 64% from $340.25 |
| Next earnings release | Sep 3, 2026 (after hours) |
| FY2027 Q2 EPS estimate | $1.82 |
| FY2027 Q2 revenue estimate | $2.46B |
Morgan Stanley does not expect the September earnings report to serve as the decisive turning point for the stock. Instead, the firm is focused on the strategic roadmap that O’Neill will lay out, specifically:
- Any detailed plans regarding store closures or optimization of the retail footprint
- Visibility into future product developments and pipeline adjustments
- Evidence of progress in strengthening full-price sell-through
Until those elements become clearer, Morgan Stanley sees the stock as being driven more by shifts in investor sentiment than by near-term fundamentals.
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