Lululemon Earnings Call: Growth Abroad, Margin Squeeze

Lululemon Athletica ((LULU)) has held its Q4 earnings call. Read on for the main highlights of the call.

Lululemon’s latest earnings call struck a cautious but constructive tone, as management balanced solid execution in product, international markets, and digital with clear warnings about a tougher profit outlook. Executives framed 2026 as a transitional year marked by tariff-driven margin pressure and slower growth in North America, yet emphasized early traction from new assortments and cost-efficiency initiatives.

Revenue Growth and Comparable Sales

Lululemon delivered modest top-line progress in Q4, with total net revenue up 1% to $3.6 billion, helped by the prior-year 53rd week. Excluding that extra week, revenue rose 6% or 4% in constant currency, and comparable sales increased 2%, indicating steady demand despite a more promotional environment.

China Strength and International Momentum

China continues to be the standout growth engine, with Mainland China revenue up 28% in Q4 and comparable sales up 26%, and management targeting roughly 20% growth for 2026 and 25%–30% in Q1. Rest of World revenue grew 12% in Q4 and is expected to expand in the mid-teens in 2026, underscoring the brand’s accelerating international diversification.

Digital Channel Strength

Digital performance remained a key pillar, with online revenue rising 9% in Q4 and contributing $1.9 billion to the quarter’s sales. Management highlighted digital as central to Lululemon’s omnichannel model, helping connect guests across e-commerce and stores and supporting resilience even as physical traffic trends vary by region.

New Product Innovation and Freshness

The company leaned heavily into innovation, calling out new franchises like Unrestricted Power, an updated ShowZero, and ThermoZen as drivers of renewed product energy. New-style penetration in North America climbed to roughly 35% from 23% in 2025, and rising employee purchases were flagged as an early signal that guests are embracing the new assortments.

Store Growth and Productivity

Lululemon ended Q4 with 811 stores and square footage up 11% year over year after adding 44 net new locations since Q4 2024. Management emphasized that new stores are still opening at returns above 100% and that its largest boxes are delivering sales productivity north of $1,400 per square foot, supporting continued brick-and-mortar investment.

Balance Sheet and Share Repurchases

The balance sheet remains a strategic asset, with Lululemon closing the quarter holding $1.8 billion in cash and nearly $600 million of undrawn revolver capacity. The company repurchased about 1.4 million shares in Q4 at an average price of $188 and $1.2 billion for the full year, and still has $1.2 billion remaining under its buyback authorization.

Action Plan and Enterprise Enablement

Management detailed an enterprise-wide action plan spanning product creation, product activation, and operational enablement focused on inventory, supply chain, and AI-driven automation. These efforts are already partially offsetting tariff costs, generating an estimated $62 million of mitigation in 2025 and targeting $160 million in offsets for 2026 to cushion gross margin pressure.

Sharp Gross Margin Compression

Despite sales growth, profitability took a hit, with Q4 gross margin falling to 54.9% from 60.4% a year ago, a steep 550 basis-point decline. The drop was driven mainly by a 560 basis-point fall in product margin, including roughly 520 basis points of negative impact from tariffs and about 130 basis points from higher markdowns.

Operating Income and EPS Declines

Operating income slid to $812 million, or 22.3% of revenue, versus 28.9% in the prior year’s quarter, reflecting both margin pressure and expense growth. Diluted EPS for Q4 fell to $5.01 from $6.14, and management guided full-year 2026 EPS down to $12.10–$12.30 from $13.26 in 2025, with Q1 EPS expected at $1.63–$1.68 versus $2.60.

North America Headwinds and Discounting

North America was the weak spot, with Q4 regional revenue flat and comparable sales down 2%, and management now expects North America revenue to decline 1%–3% in 2026. Higher markdown penetration weighed on results, with Q4 markdowns adding 130 basis points of pressure, and the company is targeting a gradual recovery in full-price selling that should turn positive in the second half.

Near-Term Margin and Expense Pressure

The company is bracing for another year of margin compression, guiding full-year gross margin down around 120 basis points and SG&A to deleverage about 130 basis points in 2026. For Q1, the outlook is more severe, with gross margin expected to be down roughly 380 basis points and operating margin about 710 basis points lower, reflecting tariffs, investments, and one-time proxy-related costs.

Inventory Growth and Tariff Burden

Inventory dollars rose 18% to $1.7 billion, with units up about 6%, exceeding unit guidance partly due to higher tariff rates and foreign-exchange effects. Management plans to rein this in, guiding dollar inventory growth to mid- to high-single digits in 2026 with flat to slightly down units, even as gross tariff impact is projected to climb from $275 million in 2025 to about $380 million in 2026.

Modest Revenue Growth and Margin Contraction

For 2026, Lululemon expects revenue between $11.35 billion and $11.50 billion, implying only 2%–4% growth, with North America down 1%–3% and international markets doing the heavy lifting. Operating margin is forecast to decline roughly 250 basis points versus 2025 as tariffs and planned investments outweigh cost offsets, keeping EPS under pressure despite ongoing share repurchases.

Short-Term U.S. Consumer and Regional Variability

Regional demand trends remain uneven, with U.S. revenue down 1% in Q4 and Canada showing modest softness, as management noted greater markdown sensitivity among Canadian shoppers. Executives expect North America to lag through much of 2026 while product, pricing, and activation changes phase in, with international strength helping to balance the regional volatility.

Guidance and Outlook

Looking ahead, Lululemon guided Q1 revenue to $2.40–$2.43 billion, up just 1%–3% year over year, with North America down mid-single digits and roughly six net new stores plus six optimizations. For the full year, the company plans to open 40–45 net new stores, deliver low-double-digit square footage growth, absorb about a 120 basis-point gross margin decline and 130 basis-point SG&A deleverage, and invest $725–$745 million in capital expenditures while maintaining a robust cash position and steady buybacks.

The earnings call painted a company navigating a challenging reset in margins while leaning on brand strength, innovation, and global expansion to sustain growth. Investors will need to weigh the near-term earnings downdraft against management’s multi-pronged plan to offset tariffs, rejuvenate North America, and harness international and digital momentum for a healthier profit profile beyond 2026.