Lululemon is taking decisive actions to address declining U.S. performance by increasing the percentage of new styles, accelerating product updates and speeding up replenishment of popular items, according to CEO Calvin McDonald during the second-quarter analyst call.
On the call, McDonald noted that Lululemon’s performance offerings, which account for approximately 60 percent of Lululemon’s assortments, continue to show growth in the U.S., with gains in the second quarter coming across key activities, including yoga, run and train, golf, and tennis.
However, lifestyle offerings, which accounted for the remaining 40 percent, continue to underperform. McDonald noted that Lululemon had invested in the second half of last year in bringing “newness” back to historical levels through new styles and seasonal color updates within core styles. While customers responded well to many of the new styles, the reaction to the seasonal color updates was less than expected.
After a deeper analysis of its current offering, McDonald said Lululemon’s product life cycles in core categories, especially lounge and social, had “run too long,” leading to decreased customer appeal.
“Our lounge and social product offerings have become stale and have not been resonating with guests,” said McDonald. “Specifically, we have seen a less enthusiastic response to some core franchises across lounge and social, such as Scuba, Softstreme and Dance Studio. We believe our opportunity lies in frequency and conversion, which are impacting their total spend. The data related to engagement and loyalty of our guests remains strong.”
He added, “We have become too predictable within our casual offerings and missed opportunities to create new trends.”
Beyond relying too heavily on core franchises, McDonald said Lululemon has been too slow in go-to-market processes to test new styles as well as replenish strong sellers. “We introduced several great new styles this spring but couldn’t chase into the demand quickly enough and left some of our guests disappointed,” he continued.
To revive demand, McDonald said Lululemon is committed to designing several new products across lounge and social while giving a “fresh perspective” to some of the brand’s staples with a mandate to reach 35 percent newness penetration by Spring 2026. McDonald said, “We will continue to gauge guest behavior and adjust this penetration in future seasons based upon their response.”
Lululemon is also enhancing its capabilities to accelerate its go-to-market process.
“By working with our vendors, we have and will continue to improve our ability to chase into strong performing styles outside of our mainline product development process,” said McDonald. “We have also improved our fast-track design capabilities, which reduces lead times by several months for select styles. These have been fully incorporated into the upcoming seasons to give us added flexibility to anticipate, meet and potentially exceed guest response and demand.”
He said the recent hiring of Ranju Da in a new role as chief AI and Technology officer “represents an elevated mandate to enable AI and technology to help expedite our product innovation process, improve our agility and speed to market and increase personalization across our guest experience.”
He expects the “most meaningful impact” from these actions to start being realized in 2026.
In other categories, McDonald said Lululemon will also focus on “maintaining our momentum” in performance apparel. However, he noted that part of Lululemon’s slowed growth is due to the overall market for premium athletic wear in the U.S. remaining challenging, with declines continuing into the second quarter.
“Consumers are spending less on apparel overall, spending less in performance active wear and are being more selective in their purchases, seeking out truly new styles,” said McDonald. “This makes it even more important that we meet and exceed the expectations of our guests.”
McDonald also said Lululemon is facing more competition in its space amid investor concerns surrounding the growth of upstarts such as Alo Yoga and Vuori.
“The competitive landscape is different today than it was even 2 or 3 years ago,” said McDonald. “And while no single competitor is having a meaningful impact on our business, there are now many players in the market. This makes it imperative that we are consistently better and stronger than ever and create the right balance of our core product and new styles across our merchandise mix.”
He said Lululemon continued to gain market share within the performance apparel sector, even as the overall market declined, according to the latest Circana market share data for the U.S. activewear space. Customers are responding well to several launches on the performance side, including The Align No Line, Daydrift and BeCalm. Said McDonald, “We know that we have a very loyal guest who continues to trust and prioritize the brand for their high-performance apparel needs. And when we deliver new innovation across the assortment, they respond and are ready to purchase.”
Second-Quarter Results
In the second quarter, Lululemon’s earnings topped guidance, but sales missed the plan, and the retailer slashed its guidance for the year, due in part to the deterioration of its U.S. business. McDonald said increased tariff rates and the removal of the de minimis exemption, which allowed shipments valued under $800 to enter the country duty-free, “played a large part in our guidance reduction for the year.”
In mid-day trading on Friday, September 5, shares of Lululemon are down about 18 percent.
In the second quarter, revenue increased 6.5 percent to $2.5 billion, representing a 6 percent increase on a constant-dollar basis. Guidance had called for revenue to be in the range of $2.535 billion to $2.56 billion, representing a 7 percent to 8 percent growth.
By region, Americas revenue increased 1 percent with same-store sales down 4 percent or 3 percent on a constant-dollar basis. By country, revenue increased 1 percent in Canada, both on a reported and constant-currency basis, and remained flat in the U.S.
International sales increased 22 percent, or 20 percent on a constant-dollar basis. China Mainland revenue increased 25 percent or 24 percent in constant currency, with comparable sales increasing 16 percent. China’s growth arrived at the low end of expectations “as we’re beginning to see some signs of macro-driven headwinds in Tier-1 cities,” said McDonald.
Rest of World, revenue grew by 19 percent or 15 percent in constant currency, with comparable sales increasing by 9 percent.
Earnings were down 5.6 percent to $370.9 million, or $3.10 a share, although ahead of guidance in the range of $2.85 to $2.90.
Gross margins decreased 110 basis points to 58.5 percent. The decline reflects an 80-basis-point decrease in overall product margin, driven by higher markdowns and the impact of tariffs. Markdowns increased by 60 basis points, exceeding expectations of 20 to 40 basis points.
Margins overall were better than guidance, calling for a decline of 200 to 210 basis points, with the upside due to a favorable mix, lower ocean freight costs, prudent management of fixed expenses, a lower-than-expected tariff impact related to timing, and a reversal of a stock-based compensation accrual.
SG&A expenses increased 90 basis points to 37.7 percent, also better than guidance calling for a deleverage of 170 to 190 basis points due predominantly to the stock-based compensation accrual reversal.
Operating income was slightly down to $523.8 million, or 20.7 percent of sales, from $540.2 million, or 22.8 percent, a year earlier.
Outlook
For 2025, the company now expects net revenue to be in the range of $10.85 billion to $11.0 billion, representing growth of 2 percent to 4 percent, or 4 percent to 6 percent excluding the 53rd week of 2024. Previously, sales for the year were expected to be in the range of $11.15 billion to $11.3 billion, representing growth of 5 percent to 7 percent, or 7 percent to 8 percent excluding the 53rd week.
By region, Lululemon now expects revenue in the Americas to be flat to down 1 percent, with the U.S. expected to be down 1 percent to 2 percent and Canada to remain approximately flat. Under its prior guidance, revenue in North America was expected to increase in the low to mid-single-digit range.
China’s Mainland is now projected to grow at 20 percent to 25 percent, down from prior guidance calling for growth in the 25 percent to 30 percent range. Lululemon continues to expect Rest of World to be approximately 20 percent.
Diluted EPS is now expected to be in the range of $12.77 to $12.97 for the year, down from the previous guidance expected to be in the range of $14.58 to $14.78 for the year.
Gross margin is expected to decline by 300 basis points, compared to prior guidance of 110 basis points. The change was driven predominantly by increased tariffs, including the removal of the de minimis exemption, offset somewhat by several mitigation efforts. Markdowns are now expected to be approximately 50 basis points higher than last year, versus a prior expectation of 10 to 20 basis points, reflecting higher levels of seasonal clearance.
Lululemon’s tariff mitigation tactics include strategic pricing actions, supply chain initiatives, including vendor negotiations, and enterprise-wide expense savings initiatives. Asked by an analyst about pricing actions, Meghan Frank, Lululemon’s CFO, said the retailer is instituting “modest price increases on a small portion of our assortment,” as indicated on its first-quarter analyst call. She said, “We continue to look at pricing. I would say those actions are in the process of rolling out, and we’re pleased with them to date, but some are still in front of us. We’ll continue to look at it as a lever as we move through the second half of this year and into next.”
Image courtesy Lululemon
