Lululemon Athletica Inc. is expected to see a sharp decline in Q2 earnings when it reports results this Thursday, September 3. Some analysts believe the retailer may further reduce full-year guidance amid worsening sales trends in the U.S. as investors anxiously await to hear turnaround plans from incoming new CEO, Heidi O’Neill.

Unfortunately, O’Neill, a former Nike veteran, does not take the reins until September 8 due to a non-compete clause and won’t likely address the investment community until third-quarter results are reported in December.

In reporting first-quarter results in early June, Lululemon slashed guidance for the year as sales growth particularly weakened in the Americas. Executives blamed subpar product launches and “negative commentary in the media” amid a proxy contest with founder Chip Wilson. Lululemon reached a settlement with Wilson in late May.

For the current second quarter, Lululemon forecast:

  • Sales between $2.45 billion and $2.475 billion, marking a decline in the range of 2 to 3 percent year over year. Prior to the updated guidance, Wall Street’s consensus estimate had been $2.6 billion.
  • By region, sales are expected to decline low double-digits in North America, increase mid-to-high teens in China Mainland, and increase high single to low double digits to increase in the mid to high teens and expand high single to low double digits in the Rest of World.
  • EPS is expected to be between $1.76 and $1.81, representing a decline of 42.3 percent at the midpoint compared to $3.10 earned in the same quarter a year ago. Analysts’ consensus estimate had been $2.68.

For the year, sales are now projected to range between $11 billion and $11.15 billion, down from a previous range of between $11.35 billion and $11.50 billion at the start of the year and now about flat compared with $11.1 billion in 2025. EPS for the year is now projected in the range of $10.95 and $11.15, down from a previous range of $12.10 to $12.30 and compared with $13.26 a year ago.

Shares of Lululemon fell $10.69, or 8.6 percent, to $114.23 after reporting first-quarter results and closed Friday at $120.81. The stock’s 52-week range is between $104.44 and $225.98. The stock’s all-time high of $516.39 was reached on December 28, 2023.

At Morgan Stanley, Alex Straton in an August-25 note said she expects little signs of improving trends for Lululemon in Q2, including potentially another shortfall in the Americas region. She also doesn’t expect any strategic updates with O’Neill’s pending arrival.

She reiterated her “Underperform” rating at a $93 price target, believing the catalyst for Lululemon’s stock will come from strategy changes announced by O’Neill. She sees a high likelihood that more downward guidance revisions will be announced early next year as part of “reset” strategy. She wrote, “Our Underweight rating reflects our view that consensus underestimates the risk of a deeper & longer Americas reset, while simultaneously overestimating the China opportunity. As a result, we think new mgmt. ultimately embraces a ‘shrink to grow’ strategy that drives another leg of negative EPS revisions.”

She outlined several potential priorities O’Neill may address initially based on successful recent turnarounds, citing Abercrombie & Fitch, Procter & Gamble, McDonald’s and Walmart as examples. Potential priorities include refocusing on core women’s yoga and performance product, narrowing the marketing message to product, retrofitting stores by activity and outfits rather than product type, fully committing to full-price selling, and slowing international expansion to focus on reviving the Americas.

Straton said, “With the stock appearing to find a floor at ~LDD [low double-digit] P/E in recent months, we think investor attention will remain focused on what incoming CEO O’Neill can do to ‘fix’ the business once she starts. In our view, her initial messaging remains the most important catalyst for the stock from here.”

In an August-25 note, UBS analyst Jay Sole said he expects weak China and U.S. sales growth outlooks will lead Lululemon to reduce its FY26 EPS by $1.25 to a range of $9.70 and $9.90, below analysts’ consensus target of $10.93 and Lululemon’s recent guidance between $10.95 to $11.15.

Sole cited industry data indicating Lululemon’s Q2 U.S. sales growth rate fell in the low double-digit rate, likely below analysts’ consensus estimate calling for a 10.5 percent decline. UBS Evidence Lab Pricing data further suggests Lululemon’s promotions in the U.S. increased “meaningfully” year-over-year in Q2 and Q3 sales are seeing a further deceleration from the Q2 July exit rate to high-teens percentage declines.

Sole still sees “limited risk” for the stock as investors are already perceiving weakening trends. He wrote, “We are hearing concerns LULU’s US turnaround, if successful, will take 18+ months to show progress, while others are worried about the trajectory for its China business.”

Sole reiterated his “Neutral” rating and slightly lowered his price target to $120 from $124. He wrote, “While we see a negative risk/reward over the Q2 event, we expect LULU to perform in-line with peers over NTM [next twelve months] & rate LULU Neutral.”

In a note issued August 13, Citi Research’s Paul Lejuez said he expects Lululemon to reiterate FY26 guidance. He suspects management embraced a “conservative approach” in reducing guidance during the first quarter report given the CEO transition.

He expects Lululemon to exceed consensus EPS estimates in the second quarter due to lower operating expenses, although he expects same-store sales to decline 7.8 percent, missing the consensus target of negative 5.3 percent. He suspects comps in America to decline 13 percent (consensus negative 12.5 percent) and China to climb 6 percent (consensus positive 12.9 percent).

Citi also expects Lululemon’s gross margins to decline 469 basis points to 53.8 percent, missing the consensus target of 54.4 percent. Lejuez wrote, “Promos have been elevated as LULU works through 1Q Yoga product, and we expect negative China headlines had an impact in 2Q, and our concern is that there could be some lingering impact to 2H.”

Lejuez said beyond guidance, investors will be focused on recovery prospects for the Americas, pressures on China’s growth, and markdown pressures. He wrote, “Overall, we believe that the guide of 2H improving markdowns seems reasonable (LULU laps 90bps/130bps of markdown headwinds in 3Q/4Q), but of course that assumes getting the product right and being able to chase product effectively. Given very high merch margins, there is always some risk that the current F26 GM guide of -90bps y/y proves too aggressive.”

At KeyBanc Capital Markets, Ashley Owens in an August-25 note reiterated her “Sector Weight” rating and lowered her FY26 and FY27 estimates as KeyBanc proprietary data shows U.S.  sales underperforming in the second quarter and into August. Her gross margin outlook was reduced to reflect higher markdowns as current inventory levels show “elevated ‘We Made Too Much’ offerings, and slowing new item introductions.”

Her updated estimates assume U.S. pressure continues over the next several quarters, further investments will be necessary to revive brand heat and product development, and markdown pressures extend through the first half of 2027.

“Ongoing promotional activity, softer-than-expected U.S. demand trends, and limited evidence that increased newness is driving a meaningful acceleration in spend leave us incrementally more cautious on the outlook,” wrote Owens. “Further, looking to 2H, the incoming CEO will assume leadership next month amid a period of organizational transition, with several senior executives recently announcing their departures across strategy, technology/AI, and communications functions; as a result, we expect the name to remain pressured for the next several quarters as new strategies are formed, and are lowering our estimates for the rest of 2026 and FY27.”

At Needham, Tom Nikic in a note issued August 18 maintained his “Hold” rating on Lululemon with no price target. The analyst wrote, “We believe demand remains

challenged, athletic names have had a tough EPS season, and the pending CEO change adds to the uncertainty.”

Nikic cited Bloomberg’s ALTD “Observed Sales” metric, which tracks U.S. debit/credit-card transactions, that showed Lululemon’s sales trends “worsened materially” year-over-year in the second quarter as well as Google search trends showing “sharp” declines in recent months.

He also said “investor skepticism towards athletic seems very high right now,” with Nike, Adidas, Under Armour, Deckers Brands and On Holdings all seeing stock price pullbacks after recent quarterly reports highlighted bearish investor concerns.

Finally, Nikic said the CEO change “remains an overhang,” with many investors wanting to hear O’Neill’s plans and some anticipating a need to “re-base” earnings and sales to best position the company to return to accelerated growth. Nikic said, “Based on our conversations, investors are concerned that FY27 could be another year of down earnings, and we don’t think those concerns will be alleviated in the near-term.”

Image courtesy Lululemon