Athletic apparel retailer Lululemon (NASDAQ: LULU) fell short of the market’s revenue expectations in Q2 CY2025, but sales rose 6.5% year on year to $2.53 billion. Next quarter’s revenue guidance of $2.49 billion underwhelmed, coming in 2.7% below analysts’ estimates. Its GAAP profit of $3.10 per share was 8.7% above analysts’ consensus estimates.

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StockStory’s Take

Lululemon’s second quarter results were met with a significant negative market reaction, primarily due to underperformance in the U.S. and a reduction in full-year revenue expectations. Management attributed these results to product fatigue in core casual lines and heightened competitive pressures in the premium athletic wear segment. CEO Calvin McDonald acknowledged that the company’s product cycle in core lounge and social categories had become too predictable, stating, “We have let our product life cycles run too long.” He also emphasized that while international markets delivered strong growth, the U.S. business faced challenges related to consumer selectivity and a lack of newness in the assortment.

Looking ahead, Lululemon’s guidance reflects caution as the brand faces both macroeconomic and industry-specific challenges. Management highlighted the impact of rising tariffs and the removal of the de minimis exemption as key contributors to lower margin guidance. CFO Meghan Frank said the company will focus on strategic pricing, supply chain adjustments, and expense management in response to these increased costs. McDonald noted that significant product assortment changes are underway, but their most meaningful impact will not be felt until 2026, underscoring the need for near-term agility while longer-term transformation efforts take hold.

Key Insights from Management’s Remarks

Management identified stale product offerings and a sluggish U.S. market as primary reasons for missing Wall Street’s revenue expectations, while international markets and performance categories continued to show resilience.

• Product fatigue in casual lines: Management highlighted that core franchises in lounge and social, such as Scuba and Softstreme, failed to resonate with established customers. CEO Calvin McDonald stated the product mix had become too predictable, particularly for high-value consumers who expect newness.

• Performance apparel remains a strength: The company continued to gain market share in key performance categories like yoga, run, and train, even as the U.S. activewear sector declined. Management emphasized that innovation in performance products, including new launches like Daydrift and BeCalm, drove positive guest response.

• International growth outpaces North America: Robust momentum persisted in China and other international markets, with China revenue up 25% year-over-year. Store expansion and local brand activations contributed to these gains, with McDonald citing new store openings in Milan and a planned franchise entry into India.

• Tariff and regulatory headwinds: Increased tariffs and the removal of the de minimis exemption (a U.S. rule allowing duty-free imports below a certain value threshold) were called out as significant pressures on gross margin. Management stated these factors will have a cumulative $320 million impact on 2026 operating margin.

• Agility and product pipeline reset: Management is accelerating the pace of new product introductions, aiming to lift the share of new styles in the assortment from 23% to 35% by spring 2026. Investments in fast-track design and the appointment of a Chief AI and Technology Officer are intended to increase speed to market and enhance innovation.

Drivers of Future Performance

Lululemon’s outlook is shaped by efforts to revive U.S. growth, mitigate tariff-driven margin pressures, and accelerate product innovation.

• U.S. product assortment overhaul: Management is prioritizing newness with a substantial increase in fresh styles, especially in casual categories where fatigue has set in. The company expects the most significant benefits from these changes to emerge in 2026, signaling a transition period for domestic performance.

• Tariff and de minimis cost mitigation: Rising costs from tariffs and the loss of the de minimis exemption are being addressed through selective price increases, supply chain optimization, and vendor negotiations. CFO Meghan Frank noted that only a portion of increased costs can be offset in the near term, with full mitigation strategies extending into next year.

• Sustained international expansion: Lululemon is investing in new stores and brand activations across Asia and Europe, with particularly strong growth in China. Management believes that international markets will continue to offset domestic pressures, aided by ongoing guest acquisition and market share gains.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will closely monitor (1) the pace at which new product introductions refresh the U.S. assortment and drive traffic, (2) the effectiveness of mitigation strategies for tariff and de minimis cost increases, and (3) continued strength in international markets, particularly China. We will also track inventory management and the rollout of technology-driven agility initiatives as key indicators of progress.

Lululemon currently trades at $173.67, down from $206.10 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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