Lululemon Athletica Inc. (LULU) finds itself in an interesting spot heading into its third-quarter earnings report. On one hand, 'Big Short' investor Michael Burry just revealed it as a high-conviction contrarian pick, dismissing the 2025 sell-off as mere "window dressing." On the other hand, the company is staring down what management has called its toughest margin challenge in recent memory.

So what's going on here? Let's break it down.

Burry's Contrarian Call

In a November 27 post on his Substack, Burry disclosed the four stocks he currently owns and likes. Lululemon (LULU) made the cut, which is notable given Burry's track record of spotting value where others see only trouble. His timing is certainly bold—the stock has been hammered this year, down over 52% year-to-date.

The Tariff Problem Nobody Saw Coming

Here's the immediate issue: Management has explicitly warned that the third quarter will be the first to fully absorb new tariff rates and the removal of the "de minimis" duty exemption. If you're not familiar with that term, it previously allowed duty-free treatment for certain low-value e-commerce shipments into the U.S. Losing that benefit is a big deal for a company that ships a lot of yoga pants directly to consumers.

During the second-quarter earnings call, CFO Meghan Frank didn't sugarcoat things. She projected a 220 basis-point hit to gross margin for the full fiscal year, driven largely by this regulatory change. That's substantial—the kind of margin pressure that makes Wall Street nervous.

The timing couldn't be worse, either. CEO Calvin McDonald admitted the U.S. business has stalled because of a lack of product "newness," with U.S. revenue flat to down in the second quarter. When your home market goes sideways and your margins get squeezed simultaneously, you've got a problem.

Management responded by lowering full-year revenue guidance to a range of $10.85 billion to $11 billion. Analysts are now expecting around $2.21 in EPS and $2.48 billion in revenue for the third quarter, according to market data.

Why Some Experts See $300 in Two Years

Despite all this near-term pain, the bull case for Lululemon is surprisingly compelling. The stock is trading at roughly 14x earnings—a historical low for a company that has typically commanded a premium valuation.

Michael Hakes, a senior portfolio manager at Murray Wealth Group, argues the market is essentially pricing LULU as a zero-growth asset. He told BNN Bloomberg that if the U.S. market merely stabilizes—not even returns to growth, just stops declining—the stock could hit $300 within two years. The key driver? Continued international expansion.

And the international story is genuinely strong. China revenue grew 25% in the second quarter, demonstrating that the brand still has serious momentum outside the U.S. If management can fix the product newness issue domestically while riding international growth, the current valuation looks absurd.

Louis Navellier of Navellier & Associates calls Lululemon a "retail bellwether" with a history of delivering earnings surprises. His view? The current pessimism may be significantly overstated, creating an opportunity for patient investors.

The Stock's Brutal Year

LULU closed Wednesday at $182.30, down 0.05%, and ticked up slightly in after-hours trading. The stock has fallen 52.33% year-to-date and 46.49% over the past year. According to market data, it maintains a weaker price trend over medium and long terms, though it shows a strong trend in the short term with a poor quality ranking.

The setup is classic Burry territory: a quality company facing temporary headwinds, trading at depressed multiples while the market assumes the worst. Whether he's right this time depends largely on two factors: how quickly the U.S. business rebounds and whether international growth can offset the margin pressure from tariff changes.

The third-quarter earnings report will provide crucial insights into both questions. For now, investors are caught between Burry's contrarian optimism and management's stark warnings about near-term challenges.