While the news of the day was CEO Calvin McDonald’s pending departure at the close of the current fiscal year, Lululemon’s management team on the company’s third quarter analyst call detailed a comprehensive action plan backed by three pillars — Product Creation, Product Activation and Enterprise Efficiency — to revive growth in the U.S. marketplace.

Shares of Lululemon are trading up about 10 percent on Friday, December 12, as investors appeared to welcome a new leadership approach after the share price of Lululemon slid nearly 50 percent over the year amid sales struggles in the U.S. and the emergence of newer competitors such as Vuori and Alo Yoga.

Third-quarter results also came in better than expected, driven by strength in China and a smaller-than-expected tariff-related hit, leading the retailer to lift its full-year outlook. Lululemon further said its board authorized $1.0 billion increase in its stock repurchase program.’

Investors, however, were said to be focused on seeing growth return in the Americas region and were likely encouraged to see sales in the region arrive as planned in the third quarter, with modest improvement expected in the fourth quarter and a product overhaul expected to revive growth next year.

In the third quarter, sales in the Americas were down 2 percent, with declines of 3 percent in the U.S. and 1 percent in Canada.

Comparable-store sales were down 5 percent on both a reported and constant-currency basis in the Americas region, marking its second straight quarter of comp declines. On a currency-neutral basis, comps in the Americas decreased 3 percent in the second quarter, 1 percent in the first quarter, and were flat in the 2024 fourth quarter.

On the analyst call, McDonald said results in both the U.S. and Canada aligned with expectations in the third quarter.

“When looking at our U.S. business, our guest metrics remain consistent. We continue to see growth in both total and retained guests, and we are acquiring new guests and retaining existing guests across all age demographics,” said McDonald. “Where we continue to have opportunity is increasing the frequency of visits and spend with our high-value guests.”

Similar to recent quarters, performance product outperformed lifestyle offerings in the U.S. McDonald said, “We continue to lead with technical innovations and saw growth in our performance activities led by run and train. Guests also responded well to our outerwear assortment with performance up strong double digits.”

On its second-quarter analyst call, McDonald said performance offerings, which account for about 60 percent of Lululemon’s mix, continue to grow in the U.S. with gains across key activities: yoga, run and train, golf, and tennis. However, Lululemon’s remaining lifestyle mix continued to underperform despite investments in the second half of last year in bringing “newness” penetration back to historical levels. He said at the time that Lululemon’s product life cycles within its lounge and social offerings had “run too long” and had become “stale” to top consumers and vowed to further ramp up the frequency of new styles and seasonal color updates.

On the third-quarter call, Lululemon CFO Meghan Frank provided a “more formal framework” for the strategies being undertaken to reignite growth in the Americas. She said, “At the highest level, the goals of our plan are simple. We are working to drive acceleration in our U.S. business, maintain momentum in our international regions and protect operating margin in the near term and drive improvement over the long term. We began this work last year as we saw the U.S. business slow, and we expect to see the most significant benefits of our work streams in 2026.”

Product Creation
The company’s priority is product creation, increasing the frequency of newness and the overall penetration of new styles from 23 percent of its mix in Q2 to 35 percent by next spring. Frank called out the progress the company has made to date with the introduction of the Milemaker, Shake It Out, Tumbled Fleece, Scuba Waffle, as well as the debut of its kit for Team Canada for the 2026 Winter Olympics.

Looking forward, Lululemon plans to update several key franchises while also maintaining a strong pipeline of innovations across performance offerings, including a focus on the training category in early 2026, and planned updates to numerous franchises, including Swiftly, Daydrift and Steady State.

Lululemon is also reducing the turnaround time for its mainline product development process to 12 to 14 months from 18 to 24 months and quickening its “chase capabilities” to restock strong-performing styles within 6 to 8 weeks.

At the same time, Frank said that as noted on the second-quarter analyst call, Lululemon’s current offerings “include certain styles that are not representative of our go-forward vision for the brand,” and broader changes are planned.

“There are many elements that we like, and our guests are responding well to. However, as we said on our last call, we’ve let product life cycles run too long within some of our key franchises. And we have not inspired our high-value guests to purchase as we had in the past,” Frank said. “I’m looking forward to 2026 as we will begin to see the excitement our creative team is bringing into our assortments. In addition, given our improved agility, we’ll be better able to read, react and adjust our assortments based on guest response to our offering.”

Product Activation
The second priority, product activation, in part involves curating LULU’s store mix across the board, not only based on climate differences but also on local customer tastes. Said Frank, “In May of this year, we began testing an updated approach to the in-store experience and have seen good initial results.”

The density of assortments will be reduced to better highlight relevant styles and enable “improved visual merchandising for the styles we know are most important to the guests in each local market,” said Frank. Product adjacencies and category flow are also being adjusted to improve in-store storytelling.

Online, a website redesign was recently rolled out featuring enhanced visual merchandising and elevated storytelling. To further engage top-tier consumers, Lululemon is enhancing its membership program and forming a new partnership with American Express, which has added a $300 Lululemon credit as a benefit for its Platinum Card members.

Finally, the product activation pillar calls for investments in integrated marketing efforts that more boldly call out the newness and innovation across performance and lifestyle categories, including product drops. Said Frank, “We will leverage our ambassadors as well as brand right creators and talent with a sharp focus on engaging guests through social channels and community activations.”

Enterprise Efficiency
The last priority, enterprise efficiency, represents a further commitment to drive efficiencies as the brand faces cost pressure from higher U.S. tariffs and the removal of the de minimis provision, which allowed shipments valued under $800 to enter the country duty-free, as it works to inflect the U.S. business. Said Frank, “While we work to inflect the U.S. business, we have a heightened focus on ensuring we’re operating as efficiently as possible across the enterprise.”

Third-Quarter Results
In the third quarter, sales rose 7.1 percent to $2.6 billion, topping company guidance in the range of $2.47 billion to $2.5 billion. Comparable sales increased 2 percent.

With the Americas down 2 percent on a reported and constant-currency basis and comps off 5 percent, the gains were driven by above-plan results in China, where revenue jumped 46 percent, or 47 percent in constant currency, with comparable sales increasing 25 percent. In China, Lululemon saw a better-than-expected response to assortments, particularly outerwear, coupled with an earlier start to 11/11 events on third-party e-commerce platforms.

In the Rest of World, revenue grew by 19 percent on a reported and constant currency basis, with comparable sales increasing by 9 percent.

Among channels, store sales were flat. Square footage increased 12 percent versus last year, driven by the addition of 47 net new Lululemon stores since Q3 2024, bringing the total to 796 globally. Online, revenues increased 13 percent to $1.1 billion, accounting for 42 percent of total revenue.

By category, men’s revenue increased 8 percent versus last year, women’s advanced 6 percent and accessories and other grew 12 percent.

Gross margins in the quarter decreased 290 basis points to 55.6 percent, better than guidance calling for a decline of 410 basis points. The erosion reflected a 290-basis-point decrease in overall product margin, driven predominantly by the tariff impact and higher markdowns. Markdowns increased 90 basis points. Foreign exchange had a 10-basis-point unfavorable impact. The upside to guidance was driven predominantly by leverage on higher-than-expected top line, lower net tariff impact and management of fixed expenses within gross margin.

SG&A expenses were down 50 basis points as a percent of sales to 38.5 percent, also beating guidance that called for a 150-basis-point deleverage. The upside was driven by top-line leverage and prudent expense management.

Operating profits were down 11.1 percent to $435.9 million from $490.8 million a year ago.

Net profits declined 12.8 percent to $306.8 million, or $2.59, exceeding guidance between $2.18 and $2.23.

Full-Year Outlook
Lululemon’s updated guidance for the year calls for:

  • Revenue in the range of $10.96 billion to $11.05 billion, representing growth of 4 percent, or 5 percent to 6 percent, excluding the 53rd week of 2024. Previously, guidance called for revenues in the range of $10.85 billion $11.0 billion, representing growth of 2 percent to 4 percent, or 4 percent to 6 percent excluding the extra week.
  • By region, sales, excluding the 53rd week and on a constant currency basis, are projected to be flat to down 1 percent in the Americas, including down 1 percent to 2 percent in the U.S. and flat in Canada. Mainland China’s sales are now expected to be at, or above, the high end of the company’s prior guidance range of 20 percent to 25 percent. Rest of World sales are now projected to be up in the high teens, up from approximately 20 percent previously.
  • Gross margins are expected to decrease by 270 basis points in the year, better than the prior guidance of negative 300 basis points due to a lower estimated tariff impact. Markdowns are expected to be approximately 70 basis points higher than last year, up from 50 basis points previously.
  • SG&A expense to deleverage 120 basis points versus 2024, above prior guidance of 80 to 90 basis points, due to further investments in marketing in Q4 to help drive traffic and build brand awareness.
  • EPS in the range of $12.92 to $13.02 for the year, down from $14.64 in the prior year. Its previous guidance called for EPS in the range of $12.77 to $12.97.

Fourth-Quarter Update
For the fourth quarter, sales are expected in the range of $3.5 billion to $3.585 billion, representing a decline of 3 percent to 1 percent, or growth of 2 percent to 4 percent excluding the 53rd week of 2024. EPS is expected in the range of $4.66 to $4.76, down from $6.14 a year ago.

McDonald cautioned that sales in China are expected to be below the Q3 trend due to calendar shifts, which benefited Q3 and will have a negative impact on Q4.

In the U.S., McDonald said the performance over Thanksgiving weekend was “encouraging.”  He said, “Given the competitive environment, we know guests are looking for value.” The CEO said the elevated traffic enabled Lululemon to clear out some seasonal and end-of-life products. At the close of the quarter, inventory increased 11 percent. On a unit basis, inventory increased approximately 4 percent, below its estimate for an increase in the low double-digits. He also said the introduction of new full-price product, including special edition training gear, was “met with good guest response.”

Nonetheless, he noted that trends have slowed slightly since Thanksgiving weekend, which he attributed to consumers trading down amid the promotional climate that’s been a pattern seen throughout the year. He added, “However, despite this, we expect revenue trends in the U.S. in Q4 to be modestly improved relative to Q3.”

McDonald also acknowledged that Lululemon continues to see competitive pressures in the apparel space. He said, “We held share in premium athletic and lost some slight share in the performance apparel as we see guest behavior and trading down.”

Leadership Update
McDonald began the call by addressing the pending CEO change, noting that in conversations with Lululemon’s board, they agreed that the “timing is right for a change as we near the end of our 5-year plan cycle” after just over 7 years as CEO.

McDonald highlighted numerous accomplishments during his tenure, including tripling revenue since joining the retailer in 2018, developing China into the brand’s second largest market, quadrupling the international business, significantly growing the men’s business, accelerating growth online, extending into new categories and activities, and its current ranking at the leading women’s active apparel brand in the U.S.  He further noted that based on guidance for 2025, Lululemon will achieve a compound annual growth rate in EPS of approximately 20 percent from 2018 to 2025.

He said, “Lululemon is a very different and much stronger company today than when I first joined the organization in August of 2018.”

McDonald noted that he will continue as an advisor through March of next year after stepping down as CEO at the close of January.  Under the succession plan, Marti Morfitt, Lululemon’s Board chair, will take on the expanded role of executive chair, effective immediately, to support the leadership transition, as a search process with an executive search firm has begun to identify the next CEO.  Frank and André Maestrini, chief commercial officer, will serve as interim co-CEOs following McDonald’s exit.

McDonald said, “I am confident in the company’s senior leaders, and I know that Meghan and Andre will do an extraordinary job. This leadership team will play an important role in creating the future for Lululemon.”

Asked what qualities Lululemon was looking for in its next CEO, Frank said, “The Board intends to do a thorough process and focus on a leader with experience in growth and transformation.”

Image courtesy Lululemon