Burry Shopped 50,000 Shares of LULU

Burry, lululemon, Silicon Investor

Scion Asset Management, led by Michael Burry, was buying LULU well before last week’s battering. Now the stock is down 55% year to date and the future looks even bleaker. Annual sales growth has slowed from post-COVID highs of +20% to around 10% and year-over-year quarterly growth rates have wallowed in the single digits for two consecutive years. Plus, 2025 EPS guidance was lowered to $12.77-$12.97 versus 2024’s $14.64.

“We have become too predictable within our casual offerings and missed opportunities to create new trends.” — CEO Calvin McDonald on last week’s Q2 earnings call.

It just seems like “lululemon” has lost its spark because of ads like this. Gen Z women don’t want to wear the same stuff as a seventy-eight-year-old steroid-abusing grandmother who is literally deadlifting twice her body weight. Millennials, Gen X, and Boomers probably don’t want to associate with swoll granny either. Meanwhile, Alo is signing young, major celebrities like Kendall Jenner and Joe Burrow to endorsement deals.

Marketing blunders can be rectified, however, and perhaps LULU hasn’t totally shot itself in the foot. This economy has indeed stretched its customers harder than a yoga session ever could, and it is also plausible that the market has overreacted because, quantitatively speaking, LULU’s results aren’t that bad. Inventory turns are still in the high 2s, and gross margins float in the high 50’s. Which is impressive considering LULU must repeatedly seduce customers into buying stuff like $38 boxer briefs. Further, at some point, any stock trading above 20x EBITDA is due for some punishment.

Culprits of LULU’s suffering include legacy co’s Nike and Adidas, and newcomers Vuori, which recently inked an endorsement deal with Arch Manning, and Alo. But that’s life in the apparel industry. Barriers to entry are low and competition is legion. So what in the world is Michael Burry doing here?

Scion bought 50,000 shares last quarter worth $11.9 million, plus 400,000 call options with a notional value of $95 million. Burry’s style is pretty sporadic, so it’s best to take his trades with a grain of salt. Nevertheless, he’s a legendary value investor wired to find margins of safety.

He may have spotted one in LULU’s track record. In 1998, Chip Wilson founded lululemon out of Vancouver, Canada, after selling his first business, “Westbeach Snowboard,” for $1 million. The idea for Lulu struck Wilson during a yoga session, realizing that women didn’t have breathable, comfortable, and fashionable workout gear. Imagine wearing itchy, thick cotton as you perform a five-minute downward dog. Miserable.

Lululemon was born to change this. The first store was a design studio by day and yoga house by night, where yogis would chat about healthy living, fitness goals, and mindfulness, while Wilson worked with instructors and asked for feedback on the product. And soon, Voilà – Lulu’s first offering was “little black stretchy pants” formally known as the “Boogie Pant,” a proprietary blend of nylon and Lycra, making for a comfy, squat-proof lining. Yogi nirvana!

LULU has been quite a blissful experience for shareholders, too. If you put one dollar into LULU’s IPO in July of 2007, you would have $11.83 today. But you didn’t, because IPO stands for “It’s Probably Overpriced” and you worried a recession was near, and you were right.

In 2008, the GFC hit. Lululemon’s cult following, however, boosted the company’s revenue by 81.3% to $269.9 million. This niche retail operation had perplexing growth and fifty percent-plus gross margins amid global chaos. Wow. But net income was $30.8 million against a $3.0 billion market capitalization.

Despite your wife’s obsession with every seasonal release, paying 100x earnings would’ve been sinful. LULU could get hit for 80% and things would still be speculative. So you passed, but visited stores during the holidays. The year was 2009, the GFC was still unfolding, but you saw happy faces, jam-packed lines, and drained wallets.

You were shocked, and despite per-share earnings growth of 30% the stock still plummeted 80%. Net earnings were $43.4 million, and LULU’s market cap hovered around $600 million, so the leading women’s “athleisure” brand traded for 15x earnings. Things looked interesting. But bargains were plentiful at the time, and LULU still had fad written all over it. You passed.

By 2014, LULU fifteen bagged. BAC, WFC, BRK.B, etc., treated you well and were definitely less risky, but your wife’s portfolio outperformed. She owned LULU, SBUX, and ULTA and hounded you that the stock was (and still is) a no-brainer. “Invest in what you know, that’s all there is to it.” she says.

So you study some Lynch and Fisher again. Timely reading, because LULU just released men’s wear, and the stock was off thirty-odd percent. Having found yourself nestled in a mile-long line outside of a LULU store, you repeatedly said to yourself the trip was only for “scuttlebutt” purposes and then slipped into a pair of shorts, which were super comfortable. Although nothing all that special, considering the price tag actually made your blood pressure go up, and the same went for LULU, which traded north of 20x earnings. So you passed, again.

Almost twelve years later, LULU’s revenues have grown from $1.6 billion to $10.6 billion, a 17.1% clip. Gross margins also improved 11.7% and earnings per share compounded at 18.6%. Explosive gains, but the stock has only returned 9.6% over the same period. LULU now trades at 11x trailing earnings, and you’re mulling over a purchase again.

This time, your wife is really letting you have it. “Honey, you’ve missed this pitch twice now. I’ve spent thousands of dollars at that damn store thanks to the stock. So please, swing this time, for Pete’s sake.” And to that you respond with something like “Well, hindsight is twenty-twenty, and I’m just not a retail guy. I can't do it. Out of my circle of competence…”

But the stock is definitely within your circle of curiosity. So can LULU raise prices? Can they innovate and get back to a mid-teens growth rate? Is management good? With a 90% confidence interval, can you say LULU will trade at 15x earnings within the next 12 months? Will your wife get the last laugh??

Chip Wilson, founder and former CEO, who left because of conflicts with the board, might have some answers. In his first book, titled “Little Black Strechy Pants,” Wilson ousted the company’s business strategy. I’ve typed paragraphs from a couple of pages below. Keep in mind, this book was published in 2018.

“They’re trying to cram too many ideas into a small store, or building impersonal mega stores. Is lululemon a streetwear brand? An accessories brand? Their stores look like Disneyland with all those keychains and other trinkets, which have nothing to do with athletics. It cheapens the brand experience. As a result, their original core customer doesn’t bother to stop by anymore.”

“For lululemon, the fundamental problem is that there’s no longer a found-owner on the board. They need someone who lives five years in the future – who can give customers what they don’t know they want yet, by taking that 20 percent risk on ideas that push the envelope. Lululemon’s stock has dropped so much because the board is numbers-driven and there’s nobody looking after the creative side. All they care about is Wall Street.”

“In that sense, lululemon has followed the same arc as many other entrepreneur-owned businesses that became mature public companies. Along the way, they lose sight of the fact that for any brand, only half of its value is financial. The other half is the subconscious feeling that brand creates for the customer.”

“With lululemon now, it’s all about delivering a low-cost product at the highest price – and maximizing sales so management and buyers can get their bonuses. The folks in charge of building out stores are bonused on how quickly and cheaply they can open them. So they’ve moved to steel fixtures, budget racks, budget everything. That way, they can find a location, paint it white, and get the place up and running in about two weeks.”

“Also, because the merchants get a bonus on margin, their goal is to make cheaper stuff and charge a higher price. That inevitably results in the wrong product for the customer – an acrylic sweater with no good reason to be in the store, or a button-down, collared shirt that nobody on the West Coast would wear. A store that used to be 80 percent athletic apparel is now 20 percent athletic – at best. The remainder is everyday clothing with a lululemon logo slapped on it.”

“Thanks to those missteps, lululemon is losing its premium position to athletic brands like Alo and Vuori. Those retailers have followed Aritzia’s lead by opening beautiful, thoughtfully laid-out stores that could be someone’s living room, with wood and rugs and good lighting. Lululemon has none of that style and elegance anymore. It’s basically the Gap from 1998.”

Harsh words from the founder, and I’m pretty confident Burry has read them. But he’s also witnessed LULU’s aggressive share repurchasing: $1.6 billion in fiscal 2025, $736.7 million in the first half of 2026, with $860 million remaining on the current program. That’s 4.3% of the market cap.

If this pace of buybacks is kept, LULU's per-share profits could surprise and zap the multiple back to life. Their balance sheet is also stout with $1.2 billion of cash against $1.8 billion of debt. I’m not a buyer here, though. I’ll sit this out and hopefully catch the Alo (ticker: ALO) IPO in 2030!

**Note – Here’s a link to “Silicon Investor” where a 25 to 29 year old Michael Burry wrote about stocks. Not so much full-blown write-ups, but informal dialogue between peers. Very fun to read, and it’s especially cool to see Burry’s progression.

In 1996, he was basically an investing rookie and asked questions like “What is your opinion on evaluating semi equips? How does one value them?” and was balked at by “Paul Senior” who incidentally runs the blog to this very day: “You're a medical doctor, ipso facto, a lousy investor :>) Paul.”

That rebuke was Burry’s origin story. Four years later, Senior belittled young contributors again, and Burry did not suffer fools this time. He ended a 509-word tangent with:

“I will forever remember Paul's welcome message to me - to the thread that I started: ‘You're a doctor, ipso facto a lousy investor."

:>))))))))))))