Lululemon's Q2 2025 Earnings Call: Contradictions Emerge in Product Strategy, Pricing, and Marketing Spend

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 4, 2025

Financials Results

• Revenue: $2.5B, up 7% YOY (up 6% constant currency)
• EPS: $3.10 per diluted share, compared to $3.15 in the prior year (including $0.15 from SBC accrual reversal)
• Gross Margin: 58.5%, compared to 59.6% in the prior year (down 110 bps YOY)
• Operating Margin: 20.7%, compared to 22.8% in the prior year (down 210 bps YOY)

Guidance:

• FY25 revenue $10.85–$11.0B (+2%–4%; +4%–6% ex-53rd week)
• Regional: U.S. -1% to -2%; Canada ~flat; China +20%–25%; Rest of World ~+20%
• FY25 EPS $12.77–$12.97; gross margin -~300 bps YOY; SG&A deleverage ~80–90 bps; operating margin -~390 bps; tax ~30%
• Capex $700–$720M; square footage growth low double digits; high end of 40–45 new stores; ~35 optimizations
• Q3 revenue $2.47–$2.50B (+3%–4%); EPS $2.18–$2.23; GM -~410 bps; SG&A deleverage ~150 bps; OM -~560 bps; tax ~30.5%
• Tariffs/de minimis: ~220 bps FY GM impact (~$240M); ~230 bps in Q3; 2026 net operating margin impact ~$320M
• Inventory: units up low double digits; dollars up low 20s in H2

Business Commentary:

• Revenue and Earnings Performance:
• Lululemon's revenue for Q2 2025 was $2.5 billion, increasing 7% or 6% in constant currency, but the company reduced its revenue and earnings expectations for the year due to underperformance in North America.

• The guidance reduction was primarily due to increased tariffs and the removal of the de minimis exemption, as well as underperformance in the U.S. business.

• Product Assortment and Strategic Initiatives:

• The company recognized that some core product franchises like Scuba, Softstream, and Dance Studio in lounge and social categories have not been resonating with consumers as well as expected.

• Lululemon is focusing on enhancing its product portfolio by increasing new styles as a percentage of the total assortment from 23% to 35% and improving agility within its go-to-market process to better align with consumer needs.

• Geographical Performance Differences:

• While revenue in the U.S. was flat, international regions such as China and Rest of World experienced strong growth, with China's revenue increasing 25% or 24% in constant currency.

• The international regions are benefiting from market expansion efforts, brand awareness campaigns, and a strong response to new product introductions, unlike the more challenging conditions in the U.S.

• Tariff Impact and Strategic Responses:

• Lululemon anticipates a 220 basis point or approximately $240 million impact on gross margin for the year due to higher tariffs and the removal of the de minimis exemption.
• The company is implementing strategic pricing actions, supply chain initiatives, and enterprise-wide expense savings to mitigate these increased costs, while maintaining financial strength and long-term brand positioning.

Sentiment Analysis:

• “EPS exceeded guidance, revenue fell short of our guidance, and we are reducing our revenue and earnings expectations for the year.” “In the U.S., we now expect a 1% to 2% decline in revenue.” “We now expect gross margin to decrease approximately 300 basis points versus 2024.” “Q3 gross margin [to] decrease approximately 410 basis points… operating margin [to] deleverage ~560 basis points.”

Q&A:

• Question from Janine Hoffman Stichter (BTIG): What product assortment changes are coming, what can impact the back half, and how big is the casual piece driving weakness?
  Response: Increase new styles, especially in lounge/social; launch Loungeful and Big Cozy in H2; newness penetration rising from 23% to ~35% by spring; casual ~40% of mix with fatigue in Scuba/Softstreme/Dance Studio; performance remains positive.

• Question from Janine Hoffman Stichter (BTIG): How are price increases performing and will higher tariffs change pricing next year?
  Response: Modest increases on a small portion are rolling out and performing fine; pricing remains a lever to evaluate into H2 and next year.

• Question from Alexandra Straton (Morgan Stanley): Is 60/40 performance-to-casual the right mix, differences by geography, and why casual fatigue?
  Response: Targeting ~60/40; growth in train/golf/tennis globally; casual fatigue stems from overreliance on core color updates; truly new twists (e.g., Scuba waffle) resonate.

• Question from Brooke Roach (Goldman Sachs): How large are down-trending franchises within casual and when can new innovation offset pressure?
  Response: Newness will rise to ~35% and over-index to lounge/social; Daydrift/BeCalm plus Big Cozy/Loungeful add breadth; improved test-and-chase to scale winners.

• Question from Jay Sole (UBS): How much faster do lead times need to get and how will you manage the change?
  Response: Accelerating go-to-market via vendor pre-positioned fabrics and flexible POs to pivot styles; fast-track design cuts months off chase; new Chief AI & Technology Officer to enable further speed.

• Question from Jay Sole (UBS): Will you increase marketing to drive traffic?
  Response: No; maintain ~5% of sales, focus on grassroots/community and targeted outreach; brand health and guest growth remain strong.

• Question from Paul Lejuez (Citi): Quantify tariff and de minimis pressure and mitigation; reconcile with higher markdowns.
  Response: 2026 mitigated impact ~$320M; offsets roughly half via expenses and half via pricing/vendor (pricing larger); higher markdowns are seasonal clearance, separate from pricing actions.

• Question from Paul Lejuez (Citi): Are pricing changes U.S.-only or global?
  Response: Currently focused in the U.S.

• Question from Adrienne Yih-Tennant (Barclays): What near-term actions before 2026 to chase winners; and quantify de minimis exposure?
  Response: New chase processes (pre-booked fabrics) can cut ~2 months; ~2/3 of U.S. e-com fulfilled from Canada previously used de minimis—its removal is meaningful; optimizing DC inventory placement.

• Question from Matthew Boss (JPMorgan): How did Q2 traffic progress and what are early Q3 trends behind the outlook?
  Response: May strongest, July weakest; traffic down slightly in stores/e-com; conversion steady; AOV flat-to-slightly worse; QTD U.S. in line with guide, Canada slightly below, China high end (Q4 China lower due to CNY shift).

• Question from Matthew Boss (JPMorgan): Industry changes affecting core assortment and U.S. vs international dynamics?
  Response: Competition is broader; performance wins via innovation, but lounge/social cores are stale; newer U.S. cohorts spend more while high-value guests spend less on repeats; international is earlier-stage and remains strong.

• Question from Michael Binetti (Evercore): Canada softness; China profitability; 2026 markdowns amid more newness?
  Response: Canada faces similar macro; U.S.-driven product changes should help; China OM expanded with e-com strength while stores were pressured; in 2026, manage inventory tightly to protect full price despite higher newness; tariffs/de minimis remain ~$320M impact.

• Question from Sharon Zackfia (William Blair): Did e-commerce outpace stores due to behavior shift or clearance?
  Response: Both: slight traffic declines in both channels; e-com conversion up; more clearance flowed through e-com, boosting its growth.