Lululemon’s Earnings Call: Growth Amid Challenges

Lululemon Athletica ((LULU)) has held its Q2 earnings call. Read on for the main highlights of the call.

Lululemon Athletica’s recent earnings call painted a mixed picture, with international growth and robust performance in the apparel segment being overshadowed by significant challenges in the U.S. market. The company is grappling with revenue guidance reductions and adverse impacts from tariffs, while efforts to revitalize product assortments are still in progress. Inventory issues and increased markdown pressures further compound the challenges faced by the company.

International Growth

Lululemon’s international segment continues to thrive, with total revenue in China increasing by 25% (or 24% in constant currency) and the opening of five new stores. The Rest of World revenue also saw a substantial increase of 19% (or 15% in constant currency), showcasing the brand’s expanding global footprint.

Membership Program Expansion

The company’s membership program is flourishing, now boasting approximately 30 million members. This growth indicates strong brand engagement and loyalty, which is a positive sign for Lululemon’s long-term prospects.

Continued Performance Apparel Strength

Lululemon’s performance apparel segment remains strong, with continued growth across key activities such as yoga, running, training, golf, and tennis. The company is gaining market share even as the overall sector faces a decline.

New Store Openings

Looking ahead, Lululemon plans to open 40 to 45 net new company-operated stores in 2025, with significant expansion efforts focused on Mexico and China. This strategy underscores the company’s commitment to growing its international presence.

U.S. Revenue Decline

The U.S. market poses a challenge, with revenue expected to decline by 1% to 2% for the year. Current results have not met expectations, highlighting the difficulties faced in this key market.

Revenue Guidance Reduction

Lululemon has reduced its revenue growth guidance to 4% to 6%, with EPS guidance in the range of $12.77 to $12.97. This reduction is primarily driven by challenges in North America.

Challenges in Product Assortment

The company’s lounge and social product offerings have become stale, with franchises like Scuba, Softstreme, and Dance Studio not resonating with guests. This highlights the need for revitalization in their product lineup.

Impact of Tariffs and De Minimis Provision

Higher tariffs and the removal of the de minimis exemption are expected to decrease gross margin by approximately 300 basis points for the year, posing a significant challenge to profitability.

Inventory Levels

Inventory levels have increased by 21% year-over-year, with unit inventory rising by approximately 13%. This increase is driven by higher tariffs and foreign exchange, adding pressure to the company’s financials.

Increased Markdown Pressure

Markdowns have increased by 60 basis points versus expectations, contributing to a decrease in overall product margin. This reflects the competitive pressures and challenges in maintaining pricing power.

Forward-Looking Guidance

During the earnings call, Lululemon revised its guidance, acknowledging several challenges impacting its performance. While EPS exceeded expectations, revenue fell short, leading to a reduction in revenue growth expectations to 4% to 6% for the fiscal year. The company plans to mitigate these pressures through strategic pricing, supply chain initiatives, and expense management. Despite these headwinds, Lululemon remains focused on product innovation, with plans to increase new styles in its assortment by spring 2026.

In conclusion, Lululemon Athletica’s earnings call highlighted a mix of achievements and challenges. While international growth and performance apparel strength are promising, the U.S. market and external pressures pose significant hurdles. The company’s strategic initiatives and focus on innovation will be crucial in navigating these challenges and driving future growth.