Shares of Lululemon Athletica Inc. (NASDAQ: LULU) suffered a sharp decline following the release of its second-quarter results for fiscal year 2025. Although the company reported earnings above expectations, investors reacted negatively due to the reduction in its annual forecasts and a weaker sales outlook in its main market: the United States.
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Why did Lululemon shares fall more than 15%?
During Friday’s trading session, Lululemon shares dropped by more than 15%, hitting $168.31 per share, and fell nearly an additional 13% after the market closed. This drop contrasts with the company’s solid earnings, raising questions among analysts and consumers alike.
According to analysts, the decline is more related to the future outlook than the quarterly performance itself. The company’s leadership lowered revenue and earnings estimates for the rest of the fiscal year, sparking a wave of investor sell-offs.
What were the second-quarter financial results?
Lululemon reported net revenue of $2.53 billion, slightly below Wall Street’s expectations. However, diluted earnings per share (EPS) came in at $3.10, beating forecasts.
Despite this seemingly strong performance, the regional breakdown reveals the core issue: while international net revenue grew by +22%, North American sales increased by only +1%, with a concerning -4% drop in comparable sales in the United States.
“We’ve taken a close look at the factors driving our underperformance and are continuing to take the necessary steps to strengthen our product assortment and accelerate our business,” said CEO Calvin McDonald, acknowledging that the company is “disappointed” with its domestic performance.
How did tariffs and trade policy affect Lululemon?
One of the key factors putting pressure on the company’s gross margin is the rise in reciprocal tariffs and the end of the “de minimis” exemption in the United States, which previously allowed many cross-border e-commerce shipments to avoid tariffs.
CFO Meghan Frank explained that the company expects a negative impact of approximately 220 basis points on the gross margin this year due to these policies, and that the team is working to offset the effects through price increases, supply chain adjustments, and cost reductions.
The firm estimates that tariffs could have a total impact of up to \$240 million on its gross margin, even after implementing mitigation measures.
What strategy is Lululemon adopting to overcome this crisis?
Amid margin pressure and weak U.S. consumer behavior — particularly affected by inflation and political uncertainty — Lululemon has decided to rethink its product strategy.
CEO Calvin McDonald acknowledged that the brand relied for too long on core franchises like Scuba, Softstream, and Dance Studio, reducing its appeal among more discerning shoppers.
In response, the company promises a more dynamic pace of innovation, with a higher share of new styles. “The proportion of fresh styles is expected to rise to about 35% of the assortment by next spring,” McDonald revealed during the quarterly conference.
What role does the international market play in Lululemon’s growth?
Despite challenges in the U.S. market, the international outlook for Lululemon is more optimistic. Revenues in China rose by a solid +25% (24% in constant currency), and the company continues to expand with new stores in mainland China, as well as openings in Italy, Turkey, and Belgium via franchise agreements.
Additionally, Lululemon has appointed a franchise partner for India, where it plans to open its first store in the second half of 2026. This strategy reinforces its long-term growth focus outside of North America.
What is Lululemon’s forecast for the rest of the year?
For the third quarter, the company expects net revenue between $2.47 billion and $2.5 billion and EPS between $2.18 and $2.23, both below analysts’ consensus.
For the full fiscal year, Lululemon has revised its guidance downward:
- Estimated annual revenue: between $10.85 billion and $11 billion, down from the previous estimate of $11.15 billion to $11.3 billion.
- Projected annual EPS: between $12.77 and $12.97, lower than the previous range of $14.58 to $14.78.
The company also stated that the benefits of its investments in product, technology, and speed-to-market will become more visible by 2026. For now, the goal is to “reconnect with high-value customers” and stabilize margins without diluting the brand’s premium positioning.
What role do stock buybacks play in Lululemon’s financial strategy?
In an effort to support share value, the company repurchased 1.1 million of its own shares at a cost of $278.5 million during the quarter.
Additionally, Lululemon ended the period with 784 active stores, having added 14 new locations, showing that physical expansion remains part of its brand strategy.
