Lululemon Is Collapsing — Burry's Biggest Bet

The Earnings Report That Stunned Wall Street

Lululemon reported fiscal Q2 2026 results on September 3, 2026, and the numbers were bad enough that the stock fell roughly 17% the following day — hitting prices not seen in approximately 8 years and pushing the stock down more than 50% for the calendar year 2026.

Revenue came in at $2.416 billion, down 4% year over year and slightly below Wall Street's consensus of roughly $2.46 billion. Global comparable sales fell 9% — or 10% in constant currency. The Americas, which account for the majority of the business, saw revenue fall 8% with comparable sales down 12%. China, once viewed as the great growth engine that would offset North American weakness, saw constant-currency comparable sales fall 8% despite 15 net new store openings since last year. International comparable sales fell 6% in constant currency. There was essentially no part of the business that was growing.

Perhaps the most striking operational disclosure was that leggings — the product most synonymous with the Lululemon brand — declined approximately 20% during the quarter. Management attributed the shift to consumer preferences moving toward looser, more relaxed silhouettes. Products like the Groove Wide-Leg and Dance Studio Pant were cited as outperformers, but their growth has not yet come close to offsetting the decline in the company's core category. When a brand built around a signature product sees that product down 20%, it is worth paying attention.

The Numbers Behind the Numbers

The headline earnings looked better than the business actually performed, and understanding why matters. Lululemon reported diluted EPS of $2.92, but embedded in that number was $134.5 million in IEEPA tariff refunds plus $4.1 million of associated interest — a combined benefit that management said added $0.86 per share to reported earnings. Strip that out and operating EPS was approximately $2.06. The underlying business earned meaningfully less than the headline suggests.

The same dynamic distorted gross margin. Reported gross margin improved 200 basis points to 60.5% — which would look encouraging in isolation. But the tariff refund alone added approximately 560 basis points to gross margin. Adjusting for that benefit suggests underlying gross margin was closer to 54.9%, down materially from 58.5% in the prior-year quarter. Occupancy, depreciation, and distribution costs also rose as a percentage of sales as the fixed-cost base spread over declining revenue. The operating leverage that made Lululemon so attractive during its growth years is now working in reverse.

The guidance reduction is the number that should be burned into every investor's memory. Lululemon entered fiscal 2026 expecting revenue of $11.35 billion to $11.50 billion and EPS of $12.10 to $12.30. After 2 guidance cuts, the company now expects revenue of $10.35 billion to $10.50 billion — a reduction of approximately $1 billion at the midpoint — and EPS of $9.48 to $9.73, a roughly 21% reduction from the original midpoint. And Q3 guidance calls for an even steeper revenue decline of 10% to 11%, suggesting the deterioration is accelerating rather than stabilizing.

How Did This Happen to Lululemon?

It is worth stepping back to understand how a company that was growing comparable sales in the high single digits just a few years ago arrived here. The answer involves a combination of competitive pressure, brand missteps, and a product mix that did not keep pace with shifting consumer preferences.

On the competitive side, Lululemon's share of the athleisure market fell by approximately 10 percentage points year over year to roughly 43.9% as of August, according to M Science data cited by Reuters. Alo gained roughly 6 percentage points. Vuori gained roughly 2 percentage points. These are brands that have positioned themselves as aspirational alternatives to Lululemon, often at comparable price points, and they are clearly taking customers. When premium athleisure customers have more choices that feel equally premium, Lululemon's pricing power and traffic advantage erode.

In China, part of the weakness was attributed to a marketing campaign involving a Japanese taiko drum at the Great Wall of China that generated negative consumer reaction. In a market where brand perception matters enormously and cultural missteps can spread rapidly on domestic social platforms, that kind of own goal is expensive. The company now faces declining comps in a market it had been counting on as a long-term growth driver.

Leadership transition adds another layer of uncertainty. Heidi O'Neill, a longtime Nike executive, was scheduled to assume the CEO role on September 8 — just 5 days after the earnings announcement. The guidance reduction and operational deterioration were delivered under interim co-CEOs. Whether O'Neill can reverse the trajectory is the central question the market will be watching closely in the quarters ahead.

Michael Burry's Biggest Bet

The Michael Burry dimension of this story is what makes it particularly fascinating. Burry — best known for his prescient bet against the US housing market ahead of the 2008 financial crisis — had been publicly discussing and adding to Lululemon throughout 2026 through his Cassandra Unchained Substack. In February he noted he was adding to his position after a pullback. In June he published a lengthy analysis of the company titled an ode to bad management and the politics of skin-tight leggings. Through July and August, based on trade disclosures tracked by financial media, his Lululemon position appeared to grow to roughly 17.4% of his disclosed holdings — approximately double his earlier position size.

On September 3 — the day Q2 earnings were released — Burry directly confirmed in his own words that Lululemon was his largest position. He called it the trickster in his portfolio. That public confirmation matters because it comes from the primary source, not from secondhand estimates of 13-F filings or portfolio trackers.

Then the next day, after reviewing the Q2 10-Q, the earnings call transcript, and the 8-K, Burry wrote that clearly things have changed for the worse. He specifically cited negative growth in China, negative growth in the Americas, global comparable sales of negative 9%, and leggings down approximately 20%. He said his intrinsic value calculation had fallen materially under his revised assumptions.

This sequence is important to understand precisely. Burry did not double down after the earnings disaster — he had been building the position throughout 2026 ahead of these results. When the earnings came in materially worse than he had modeled, he did not dismiss the deterioration. He acknowledged it explicitly and said his fair value estimate had dropped. This is not a story of a contrarian investor shrugging off bad news. It is a story of a concentrated bet meeting a result that changed the underlying thesis — and a serious investor being honest about that in real time.

What Investors Are Weighing Now

The bull case for Lululemon at current prices rests on several things. The brand still has enormous global recognition and a loyal customer base. Gross margins, even after stripping out the tariff benefit, remain relatively high for a specialty retailer. The company has $1.39 billion in cash and has been buying back stock aggressively — roughly $688 million in the first half of fiscal 2026 alone, reducing the diluted share count by approximately 5.6% year over year. A new CEO with a strong operational track record is taking over at a moment when expectations are already deeply depressed. And after a 50% decline in 2026, the stock is trading near 8-year lows. If O'Neill stabilizes the Americas business, reignites product innovation, and China recovers, the stock could look very cheap at current levels.

The bear case is equally clear. Comparable sales are declining in every geography and accelerating to the downside — Q3 guidance calls for a 10% to 11% revenue decline, worse than Q2's 4% decline. The core product category is losing share to Alo and Vuori. The leggings decline suggests a more fundamental shift in consumer preferences that may not reverse quickly. Management credibility has been damaged by 2 guidance cuts within 6 months totaling roughly $1 billion in revenue and 21% in earnings. And the new CEO is inheriting a deteriorating business rather than a stable one, which limits how quickly a turnaround can manifest.

Burry's willingness to make Lululemon his largest position and then publicly acknowledge the fundamentals got worse than he expected is a rare moment of transparency from one of investing's most respected contrarian voices. Whether he is early or wrong will take several quarters to determine. But the setup — a premium brand down 50% in a year, a new CEO, deeply negative expectations, and a concentrated bet from a serious investor who is clearly watching the details closely — is exactly the kind of situation worth doing your own research on. Tag me in the community and let's talk through what your stock analyzer says about Lululemon at current prices.

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