What impact does the trade deal have on Lululemon's cost structure?

The trade deal, specifically the tariffs imposed on imports, has a significant impact on Lululemon's cost structure: 1. **Gross Margin Contraction**: The U.S. tariff regime has led to a 200 basis points of gross margin contraction in 2025 for Lululemon. This is a direct result of the company having to absorb the additional costs associated with the tariffs. 2. **Price Increase Strategy**: To offset the costs, Lululemon has implemented price increases on 20% of its product line, including iconic items like leggings. However, this strategy carries the risk of alienating price-sensitive buyers and could impact the company's market position. 3. **Supply Chain Diversification**: The company is diversifying its production to Southeast Asia to mitigate the risks associated with tariffs on Chinese imports. However, this shift carries logistical risks and higher costs, which could further impact the company's cost structure. 4. **Cash Flow Impact**: Lululemon maintains a $1.3 billion cash buffer, which provides some resilience in the face of these cost pressures. However, the stock has plummeted 22% in premarket trading after downgraded guidance, signaling investor anxiety over margin resilience. In conclusion, the trade deal, particularly the tariffs, have a profound impact on Lululemon's cost structure, forcing the company to make strategic adjustments to manage the resulting pressures on its margins and cash flow.