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Michael Beugry just announced that he's buying some very notable new stocks, and this time the company he's buying might surprise you. No, this is not an AI company. This is not a fast-growing technology stock. Oddly enough , this isn't even a company that's doing particularly well right now. Its shares have fallen about 75% from their highs.
Sales growth has slowed. Profits are under pressure. The tariffs are hurting margins, and almost every Wall Street analyst has become incredibly pessimistic. In fact, only two analysts out of 32 on Wall Street dare to give this stock a "buy" rating. This company is Lululemon. So why is one of the world's most famous value investors buying it now?
And how profitable does he think Lululemon really is ? Well, that's exactly what we're going to talk about in this video, because Bugry recently published a 6,000- word report on exactly what he thinks about this business on his Substack. And while I won't read it word for word, I want to go through his theses to try to understand what he sees that the rest of the market is currently not noticing.
Also, quick news: Phil and the Rule One team may think just like Bugry. Speaking of Phil: if you'd like to come to one of our three-day in-person investing seminars, please add your name to the list in the pinned comment. Nothing has been officially announced yet, but we are pretty sure we will be hosting another live seminar from September 18th to 20th .
But the number of places is strictly limited—300 people. Honestly, it's just the capacity of the venue. So , if you want to be the first, add your name to that list and we'll send you an email before we announce it more broadly. But back to Michael Beugry and Lululemon: I wanted to start with a little context on why everyone hates these stocks right now , because it's really a lot of their own fault.
Today, business is facing five major challenges. And let's start with the more objective ones. The first is a slowdown in sales growth. For years, Lululemon has been one of the biggest success stories in retail. You know, revenue seemed to be growing year after year, and investors were willing to pay a premium for that growth.
But recently, especially in North America, this momentum has slowed significantly. Comparable sales have turned negative, customer traffic has weakened, and management now expects little or no revenue growth this year. So, this is an obvious problem. Then, the second problem is duties. So, Lululemon makes most of its clothing overseas, and the U.S.
tariffs have really hit the company hard. They have significantly increased costs. Management recently said tariffs alone reduced gross margins by nearly three percentage points last quarter, and further pressure is expected throughout the year . So, this is a significant hit to profitability. Third, let's be honest: Lululemon has also made its own mistakes on numerous occasions.
You know, many, many times. For example, one of Lululemon's big new legging designs called Breeze Through was recently canceled because it looked completely wrong and was nicknamed "whale tail." The company also acknowledged inventory planning issues, which left stores short on popular colors and sizes while having too many other items.
So, things are bad. And then, very recently in China, which is a key market for them, you can't say it any other way, they used a Japanese war drum at their promotional yoga event on the Great Wall of China. Oh. So, yes, none of these problems are catastrophic on their own, but together they create a nasty picture.
Next, this is the third problem. The fourth issue that currently concerns investors is increased competition. Brands like Alo and Vuori are becoming increasingly popular , while cheaper alternatives are now widely available through chains like Amazon. Whether these competitors are taking away market share forever is debatable, but investors are clearly concerned that Lululemon's dominance in the premium sportswear segment is no longer as strong as it once was.
This is point number four. And finally, point number five: uncertainty about leadership. You know, Lululemon is currently run by interim co- CEOs, with a permanent CEO not due to take office until the end of this year. It will be Heidi O'Neill from Nike, but she's not there yet. So, many questions remain, and because of this uncertainty, the market is simply waiting to see if the new management will do anything.
Overall, it's not the best report, and when you consider these five points, it becomes clear why the stock fell so dramatically. And, frankly, for most investors, that's where it ends. They just throw Lululemon off their list and move on to something like Nvidia or SpaceX, something more exciting. But if Michael Berry is known for anything throughout his investing career, it's his contrarian stance .
Berry admits that he sees this as a potential option for the company's recovery. So he does n't just invest based on the current situation, he asks: "Are these problems temporary or permanent?" Is the brand finally in the trash, or is it simply being poorly managed? Has the competitive advantage disappeared , or is the business simply being destroyed?
Well, according to Michael Bury, the most interesting thing and the thing that really caught his eye wasn't what was happening today at all. In fact, all of this has happened before. As he delved into Lululemon's history, he noticed something interesting. Many of the issues that concern investors today are actually not new .
In the early 2010s, Lululemon was going through a crisis that looked like a full-scale corporate collapse. There was a famous story called " Who is John Galt?" A PR disaster that angered many key clients. Then there was the recall of translucent yoga pants. Founder Chip Wilson also made a series of controversial public statements, profits fell, online sales stalled, management changed constantly, and the stock stagnated for years .
If you were an investor at the time, it would have been very easy to conclude that Lululemon's best days were behind it, but that's not the case. Eventually, a new CEO came in , management quality improved, margins recovered to record highs, and the stock made one of the greatest leaps in retail over the next decade .
I should clarify: Michael Bury is not saying that history will automatically repeat itself, but he is asking an important question. If Lululemon once recovered from a management-induced crisis, could today's problems be just another chapter in the same story? Is Lululemon a fundamentally broken business, or is it simply a company going through a difficult period?
The first thing he pays attention to is the brand itself, because, frankly, if the brand dies, the rest doesn't matter. If the competitive advantage is gone, it's the end, especially for a sportswear company . Many investors point to competitors like Alo and Vuori as evidence that Lululemon's best days are behind it, but Bury doesn't seem convinced that's the case.
In his report, he claims that Lululemon still has quite loyal customers. He notes that at least 95% of Lulu customers do not buy products from these new brands. It also proves that it is still one of the strongest premium sportswear brands in the world. You know, I tend to agree. And while most people still think of Lululemon as a women's yoga wear brand, the men's segment has quietly grown into a multi-billion dollar business.
So he doesn't see the brand losing relevance . He sees a brand that is simply being mismanaged. So, that's point number one. He then moves on to the question of whether the company's profitability has been permanently damaged. Again, his answer seems to be no. Right now, yes, profits are under pressure, but he argues that much of this pressure is due to temporary factors, not permanent ones.
Tariffs, for example, are now really raising costs. The company had to reduce prices on some products due to short-term inventory management errors. And several recent product launches simply haven't resonated with customers the way management had hoped. Of course, none of this is good, but these are short-term problems or outright management miscalculations.
This is not at all the same as a business whose economic performance has finally deteriorated. And finally, the most interesting thing: he looks at financial indicators, because even if growth is slow, even after management mistakes, is this business generating real money? The answer is yes, 1.1 billion over the last 12 months.
That is, Lululemon still generates about 11 billion in annual revenue. The company has about $1.5 billion in cash on its balance sheet, virtually no debt, and with a current share price down 75% and a P/E ratio of nine, it continues to buy back its own shares. In fact, management recently approved another billion dollars in share buybacks.
This is not usually the case for a company struggling to survive, and this is really the key point that Michael Bury is making. He's not saying that Lululemon is doing well, quite the opposite. He argues that the market may perceive a business with entirely temporary operational problems as if it were in a state of decline.
And if he is right about this distinction, that is where the opportunity may lie. This brings us to his valuation. I want to emphasize that what we discuss in the next section is in no way a recommendation to buy, hold, or sell Lululemon stock . This is not my job. That's just what Michael Bury thinks.
So, of course, take all of this with a certain amount of skepticism. Remember, Michael Bury already has a stake in this company. So be sure to do your own research and make your own decisions. But given that , what does Michael Bury think? He does not mention price targets in his report. Instead, it focuses on expected profitability.
He has his own grading structure, which he calls IV8, IV12, IV15, IV18, IV20. Don't worry about the names. The basic idea is actually quite simple. Instead of asking, " How much is this company worth today?" Berry asks, "If I buy this business at today's price and hold it for the next 15 years, what annual profit can I expect to make if my assumptions are roughly correct?" So, the higher the number, the better the expected long-term return.
And according to his analysis, he now believes that Lululemon has become what is known as an IV 18. In other words, based on his assumptions, he believes that buying the stock at today's price could potentially provide an 18% annual return over the next 15 years. But, of course, this is not a prediction, it is not a guarantee.
This is simply a result of Berry's valuation model. But what's interesting is how rarely, he says, such opportunities arise. In his article, he explains that IV 18 and IV 20 usually only appear when the market becomes extremely pessimistic about quality businesses. And this usually happens because investors have begun to perceive temporary problems as permanent.
And that's exactly what he believes happened with Lululemon . In fact, Berry says he just increased his position again, bringing the average purchase price to about $125 per share. So, this is not just an interesting idea for him, it is a thesis that he is backing with his own capital, and by all accounts, it is a long-term thesis, not a short-term deal.
Of course, that doesn't mean he'll be right, but it does tell us that he clearly believes the market's view of Lululemon has become much more pessimistic than the business deserves. So, what's next? If Michael Berry is right, what should happen from now on ? Well, it probably all starts with a new CEO.
So, later this year, Heidi O'Neill will officially take over after working for more than two decades at Nike. It's worth saying that not everyone is convinced that she's the best person for the job. Some investors point to Nike's recent struggles and question whether it is qualified enough. But at this point, I don't think Berry's thesis revolves around the ideal CEO, just not a terrible one.
It is based on improving task performance compared to the current state. You know, if product launches improve, if they stop hurting themselves, if they manage inventory better, margins start to recover, customer demand stabilizes, you know, chances are the market could start to look at Lululemon very differently.
It is precisely this turn of events that Berry seems to be betting on. Of course, none of this is guaranteed. There are certain risks, you know: if the new management fails to cope with the tasks, if competitors continue to take away significant market share, or if the current slowdown in growth turns out to be permanent rather than temporary, then this investment thesis may turn out to be wrong.
And this is still an important point to remember. Michael Burry is buying an imperfect business here. He buys a poorly managed company about which, in his opinion, the market has become too pessimistic. Only time will tell if he is right . But having said that, one last thing I want to quickly remind you of: If you're interested in Lululemon or any other stock and want to conduct your own valuation through discounted cash flow analysis, be sure to pick up a copy of New Money Strategies.
This is a complete overview of Warren Buffett's business analysis method, so check it out if you're interested. Also, don't forget to sign up for the newsletter if you want to attend the live workshop in Atlanta with me and Phil Towne from September 18th-20th . But having said that, friends, please like the video if you enjoyed it. Subscribe if you want to see more, and see you all in the next video.
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