Lululemon Athletica Inc. slashed its full-year guidance for the second straight quarter as softer-than-expected Q2 sales have deteriorated further in Q3 in its largest markets: North America and China. Beyond weak responses to new product launches, Lululemon told analysts its core legging category is being impacted by a shift toward looser-fitting styles.

Shares of Lululemon on Friday are down about 16 percent in early-morning trading.

For the year, Lululemon now expects sales to decrease 4 percent, or down 5 percent on a constant-dollar (CD) basis, down from guidance calling for a decline of 1 percent to flat growth given during Lululemon’s first-quarter results. When it reported fourth-quarter results in mid-March, the forecast called for growth of 2 percent to 4 percent.

EPS for the year is now expected to be in the range of $9.48 to $9.73, down from a range of $10.95 to $11.15 provided during its first-quarter report and $12.10 to $12.30 provided at the start of the year. At the midpoint, earnings of $9.61 will represent a 27.6 percent decline versus $13.26 earned in 2025.

Lululemon’s peak annual earnings of $14.64 were reached in 2024.

Meghan Frank, interim co-CEO and CFO, on the analyst call inferred that more adjustments may be coming as Heidi O’Neill, a former Nike veteran, takes over as Lululemon’s fifth CEO on September 8. Her arrival was held up due to a non-compete clause.

Frank said, “We’re excited our incoming CEO, Heidi O’Neill, joins us next week. And we expect she will take a deep dive into the business, evaluating our strategy and current action plans. And we look forward to the fresh perspective she will bring to define the path forward for Lululemon’s next chapter. In the near term, our teams remain focused on execution.”

For the second quarter, decreased 4 percent, or down 5 percent on a constant-dollar (CD) basis, to $2.4 billion, below company guidance in the range of $2.45 billion to $2.475 billion and analysts’ consensus target of $2.46 billion. Excluding 86 cents per share in tariff refunds, adjusted EPS in the quarter was $2.06, topping guidance in the range of $1.76 to $1.81 and analysts’ consensus estimate of $1.79.

On the analyst call, Frank said that during the first quarter, Lululemon saw “some encouraging signs indicating we were moving in the right direction to strengthen performance in North America while continuing to expand our global growth engine.”

However, as the retailer moved into the second quarter, “negative commentary” in the media and social channels impacted traffic, leading to a softer-than-planned response to some new product launches and a “moderating” sales trend.

The sales shortfall in the quarter was driven predominantly by China Mainland, where revenue grew 4 percent. North America finished down 8 percent for Q2, slightly ahead of guidance.

However, both regions have weakened in the third quarter, leading to the guidance cut for the year. Frank said, “As we move into Q3, while we are seeing good guest reaction to our activations and some of our newer styles, the overall response to our product launches remains inconsistent. And we’ve continued to see pressure on the brand in both of our largest markets. Based on our assessment of these current trends, we’ve updated our guidance for the remainder of the year.”

Category Performance
Regarding product, Frank particularly called out weakness in leggings, where sales fell approximately 20 percent in Q2. She said, “While we have been planning into lower legging sales, and we are seeing good traction in several of our away-from-body styles, we are not yet able to fully offset these declines.”

She added, “Leggings remain an important category for us, where we remain the market leader. The wellness trend is strong. We continue to be a leader in technical fabric development, and guests continue to purchase our leggings for their exercise and training needs, particularly yoga and Pilates. We remain committed to the category, but there are shifts occurring with guests looking for away-from-body silhouettes.”

Across categories, men’s revenue decreased approximately 1 percent in the quarter versus last year in the quarter while women’s decreased 4 percent.

Accessories saw notable weakness, with sales down 13 percent in the second quarter. Frank said, “While backpacks are strong, we are seeing overall softness in bags. In addition, we are strategically editing the overall accessories assortment to better align with our go-forward vision for the brand.”

Regional Performance
North America revenue decreased 8 percent with comparable sales down 12 percent in the second quarter. By country, revenue decreased 11 percent or 9 percent in constant currency in Canada and decreased 8 percent in the U.S.

The quarter marked North America’s fifth straight quarter of declining sales.

Andre Maestrini,  interim co-CEO, president and chief commercial officer, noted that beyond product and brand initiatives, Lululemon is seeking to revive sales in North America by elevating the “guest experience” at the store level by updating fixture packages, further reducing SKU density and increasing localization of assortment. He added, “We’re also better organizing the guest journey by changing product adjacencies and merchandising by activity.”

Online, Lululemon is placing a “sharp focus on storytelling and driving conversion when guests visit our e-commerce sites.” Lululemon’s homepage was recently redesigned as well as category detail page. The product detail page will be undergoing an update in a few weeks.

China Mainland revenue increased 4 percent or decreased 2 percent in constant currency in the second quarter, with comparable sales decreasing 8 percent.

Mastriani said China’s performance was “well below” internal expectations and notably impacted by negative brand sentiment in the region that hurt traffic and overall sales momentum. He said, “This began with spikes of negative commentary in the media and on social channels at the end of Q1 and early Q2, and was compounded by the additional commentary post our Q1 call related to an event we held on the Great Wall of China. These factors have contributed to softness in both our store and digital channels. “

Performance in e-commerce further impacted by a decision made by Tmall not to anniversary their 618 event in the same way as last year. Lululemon also did not participate in promotions following the event.

Maestrini  said, “As you know, we’ve experienced rapid growth in China Mainland over the last several years. But while we are disappointed with the current performance in the region, we are focused across both product and brand efforts to drive inflection. And we remain confident in our teams, our strategy, the underlying strength of our brand and the opportunity China Mainland continues to hold for lululemon’s future. “

Among the positives in China, the Together Feels Better campaign featuring ambassador and world champion swimmer, Wang Shun, and other athletes saw a favorable guest response. More activations are planned in the region. Added Maestrini, “Looking ahead, we will strengthen our brand narrative and messaging through a multilayered approach, including key new store openings with associated activations, partnering with Tmall for a Super Brand Day event,  and leverage our thought leadership in the well-being space with an event for World Mental Health Day. This moment and the guest engagement we continue to see with these campaigns and activations show the underlying strength of lululemon in the market and the potential that exists for us in China Mainland.”

In the Rest of World segment (EMEA and APAC), revenue increased by 5 percent or 6 percent in constant currency in the quarter, with comparable sales decreasing 3 percent.

South Korea “continues to be one of our strongest” markets globally, but Australia’s results are being impacted by an “increasingly promotional” marketplace. Japan continues to be impacted by reduced tourist traffic, although the brand “remains strong” in the country with the recent opening its largest store in APAC in Tokyo’s Harajuku district generating a “great response from guests.”

In EMEA, the Middle East franchise business continues to be impacted by the conflict in the region as well as by weak European tourism, but Lululemon still sees strong potential for growth in EMEA. The brand recently launched its first marketing collaboration with Zalando across 12 markets in Europe, marketing investments are planned around the Berlin Marathon, and recent franchise stores have opened in Athens, Greece, and in Bucharest, Romania. Said Maestrini, “This market expansion speaks to the still untapped demand for our brand in new markets as we look at our longer-term plans. I will now hand it back to Meghan to share more details about our financial performance.”

Profitability & Expenses
Gross margins improved 200 basis points in the quarter to 60.5 percent year over year, including the benefit of $134.5 million of tariff refunds. The margin gains reflect 560 basis points of benefit from IEEPA tariff refunds, 100 basis points related to enterprise efficiency initiatives, and a favorable foreign exchange impact of 20 basis points. Those factors offset a 150 basis point decline in overall product margin driven predominantly by tariff impact and markdowns, and a gross negative impact of 160 basis points from higher tariffs, exclusive of the refund. Markdowns increased 70 basis points.

Deleverage on fixed costs was 230 basis points, driven by ongoing investments in our store fleet and regional mix and additional fulfillment costs as we optimize our North America DC network. Excluding the tariff refund, gross margin was 50 basis points better than guidance for a 410 basis point decline, driven by 40 basis points related to the reversal of an incentive compensation accrual and favorable channel and category mix, offset by slightly higher markdowns.

In total, the company received International Emergency Economic Powers Act (IEEPA) tariff refunds of $134.5 million plus associated interest of $4.1 million during the second quarter of 2026. These amounts were recognized as a reduction of cost of goods sold and an increase to other income.

SG&A expenses were $1.0 billion, or 41.7 percent of net revenue, in Q2, compared to $951.7 million, or 37.7 percent a year ago. The 400 basis-point increase was attributed to fixed cost deleverage, continued investment in guest experience including store labor hours, brand spend, and fees related to the proxy contest. These were partially offset by lower incentive compensation and ongoing initiatives to manage costs across the company.

Operating income was $453.7 million, down from $523.8 million in Q2 2025. Operating income in Q2 2026 includes the $134.5 million of tariff refunds.

Other income (expense), net increased $4.0 million to $13.7 million from $9.7 million in Q2 2025, primarily due to an increase in interest income driven by $4.1 million in interest associated with tariff refunds.

Income tax expense was $138.1 million in Q2, compared to $162.6 million in Q2 2025, and the effective tax rate was 29.6 percent compared to 30.5 percent in Q2 2025.

Second quarter net income was $329.2 million, or $2.92 per share, compared to $370.9 million, or $3.10, in Q2 2025. Diluted earnings per share in Q2 2026 includes the 86 cents per share related to tariff refunds and associated interest, net of tax.

Balance Sheet Summary
Cash and cash equivalents were $1.4 billion at the end of Q2 2026 and the available capacity under a committed revolving credit facility was $593.7 million.

Inventories decreased 1 percent to $1.7 billion at the end of Q2 2026 compared to the end of Q2 2025. On a unit basis, inventories decreased 7 percent.

Action Plan Update
Frank provided an update on Lululemon’s “Action Plan” to revive growth and boost profitability while admitting the payback has been lagging so far. She said, “We anticipated our plan would take some time to gain traction as we bring in new innovations, elevate our store and digital experience, and increase and redirect our marketing spend. But we expected a better response than we are seeing as we enter the second half of the year.

Around product, she said Lululemon is focusing on bringing updates to core franchises, introducing new styles, overall SKU reductions and tightly managing inventory levels. The retailer is also chasing approximately 20 percent more volume this year relative to last year. with a goal of getting back into certain strong-performing styles, including Groove and Define styles, more quickly.

“In Q2, while we’re seeing green shoots in product, particularly within some of our newer away-from-body bottoms for women, we are also seeing an inconsistent performance in our assortment overall,” said Frank. “This included a greater-than-expected slowdown in some of our core categories, particularly leggings.”

In women’s tops, customers are “responding well” to Scuba and Steady State styles now offered in the brand’s SuperLoft fabric, and the Define franchise “continues to perform well.” In men’s, strength is being seen in Metal Vent Tech tees and its golf tops.

While leggings have underperformed, several new away-from-body styles, including the Groove Wide-Leg, the Align Foldover Jogger, the Breezily and its updated Dance Studio Pant, are seeing encouraging responses. Frank said, “All are trending well, and we expect momentum to build in the back half of the year and into 2027.”

Within marketing, Lululemon is moving forward with plans to increase investments in the back half of the year. Frank said, “We’re seeing strong community engagement with our recent campaigns and activations. And while we haven’t yet seen an impact on the top line trajectory, we are encouraged by the response.”

Among the recent successful activations, Lululemon brought back the SeaWheeze Half Marathon and Festival in Vancouver for the first time since 2019 and drew nearly 10,000 runners. It plans to bring the event back again next year. She said, “Guest engagement in events like this demonstrates the passion for our brand and the strength of our connections with the communities we serve.”

Frank said Lululemon is also investing more in “mid-funnel creator and social content to build relevance, engagement and product consideration.” One recent example was a  YouTube series featuring some of the brand’s elite athletes. Frank said, “We remain confident these investments will help to reignite our sales trends over time as we continue to elevate our product and marketing execution.”

The Action Plan also calls for a focus on expense discipline. Frank said Lululemon will take an “even more aggressive stance on expense management,” including seeking cost efficiencies across travel, professional fees, store labor hours and head count growth moderation. Lululemon is also planning approximately 35 net new store openings this year, down from guidance of approximately 40 last quarter, and plans to reduce holiday pop-ups from 65 last year to approximately 40 this year. Frank said, “We won’t take steps that will negatively impact the brand or our long-term growth potential, but we recognize that current top line trends necessitate a smaller expense profile, and we are acting accordingly.”

Frank concluded her formal comments by noting that while Lululemon has “significant work” ahead to revive momentum, the adjustments to product assortment, marketing and community activations are expected to improve top-line trends. She also expressed strong confidence that Lululemon will be able to win back consumers.

“One thing is certain to me, our brand has real opportunity ahead of it,” she added. “We’ve seen this with a response to SeaWheeze and engagement with our campaigns and in the strength of our teams around the world. We know our guests continue to love the brand, and we need to consistently give them the product and experience they can expect from Lululemon. And as Heidi joins us next week, I’m confident that she’ll help us realize this opportunity.”

2026 Outlook
For the third quarter of 2026, the company expects net revenue to be in the range of $2.290 billion to $2.320 billion, representing a decline of 10 percent to 11 percent. By region on a reported basis, North America is expected to decline in the mid-teens, with the U.S. also in that range, and Canada lower. China Mainland and the Rest of World are projected to increase 3 percent to 5 percent.

EPS is expected in the range of 93 cents to 98 cents for the quarter, down from $2.59 a year ago. Gross margins are expected to decrease approximately 250 basis points compared to Q3 of 2025 with improving product margin offset by deleverage on fixed costs and ongoing investment in store openings, optimizations and its distribution network. Markdowns are expected to increase approximately 60 basis points. Frank said, “While we continue to focus on improving full price selling, the slower-than-expected top line trends will necessitate additional seasonal clearance.”

For 2026, revenue is now expected be in the range of $10.35 billion to $10.5 billion, representing a decline of 5 percent to 7 percent. By region, revenue in North America is now expected to be down in the low double digits, with the U.S. also in that range, and Canada slightly lower. Revenue in China Mainland is projected to be up in the high single digits, with an increase in the mid-single digits in Rest of World. EPS is projected in the range of $9.48 to $9.73 versus EPS of $13.26 in 2025.

Image courtesy Lululemon