Lululemon’s Q2 Earnings: A Contradictory Performance Amid Tariff Pressures and Weaker Guidance

Lululemon’s Q2 2025 earnings report has sparked a sharp selloff in its stock, with shares plummeting over 10% in after-hours trading and falling more than 45% year-to-date [1]. The company’s results, while showing a modest earnings beat, revealed a profit decline, revised guidance, and mounting concerns over U.S. demand and product stagnation. This article examines whether the selloff reflects an overblown reaction to near-term headwinds or a justified cautionary signal for investors.

Earnings Analysis: A Mixed Bag of Results

Lululemon reported Q2 net income of $370.9 million, down from $392.9 million in the prior year, with earnings per share (EPS) at $3.10, slightly below the $3.15 recorded in 2024 [1]. The decline was attributed to tariffs and the removal of the de minimis exemption, which is expected to reduce gross profit by $240 million in 2025 and $320 million in 2026 [2]. Revenue for the quarter rose 7% to $2.53 billion, but this fell short of the $2.54 billion consensus estimate [3]. The company also cut its full-year revenue guidance to $10.85–$11 billion, a 2.7% reduction from previous expectations [4].

The U.S. market, once a growth engine, now poses a significant challenge. Same-store sales in the Americas declined by 4%, and CEO Calvin McDonald admitted that core product lines like lounge and social wear had become “predictable” and failed to resonate with consumers [5]. These domestic struggles contrast with robust international performance, where sales grew 15% year-over-year, driven by Mainland China’s 39% increase [6].

Analyst Reactions: Skepticism vs. Optimism

The earnings report triggered a wave of downgrades from analysts. Morgan Stanley and Citi Research reduced price targets, citing margin pressures and weak U.S. traffic trends [7]. Jefferies maintained an Underperform rating, emphasizing the declining U.S. business [8]. However, some analysts see value in Lululemon’s international expansion. Seeking Alpha upgraded the stock, arguing that the selloff has created “salvage value” as international growth offsets domestic headwinds [9].

Michael Burry’s $11.9 million stake in Q2 2025 also signals confidence in the company’s long-term potential [10]. Yet, the broader market remains skeptical. Options data priced in a potential 11.9% move post-earnings, far exceeding historical volatility [11].

Strategic Initiatives: Navigating Tariffs and Product Stagnation

Lululemon’s response to tariffs includes strategic price hikes in the U.S. and increased markdowns to clear inventory [12]. The company is also accelerating product innovation, introducing new categories like footwear and self-care products under its “Science of Feel” approach [13]. Additionally, the “lululemon Like New” resale program aims to boost sustainability and customer retention [14].

Internationally, the company plans to open stores in Europe and Asia-Pacific, including Italy, Spain, and the Czech Republic [15]. These moves align with its Power of Three ×2 initiative, which aims to double total revenue to $12.5 billion by 2026 [16].

Valuation Metrics: Undervalued or Overhyped?

Lululemon’s current valuation appears attractive. The stock trades at a P/E ratio of 13.39x, significantly below the peer group average of 64.14x and the luxury industry average of 20.53x [17]. Intrinsic value estimates suggest the stock is undervalued by 39–41% compared to its $206.09 price [18]. The EV/EBITDA ratio of 8.1 further underscores a discount relative to Nike’s 18+ [19].

However, the balance sheet reveals mixed signals. While the company holds $1.3 billion in cash, inventory has surged 23% year-over-year to $1.7 billion [20]. A negative free cash flow of -$0.3 billion in Q1 2025 raises concerns about liquidity [21].

Historical Context: Resilience vs. Current Challenges

Lululemon’s stock historically outperformed during previous tariff events, such as the 2018–2023 trade wars, growing 94% since 2019 despite global uncertainties [22]. The current selloff, however, reflects a confluence of factors—tariffs, product stagnation, and U.S. demand weakness—that were less pronounced in the past. The removal of the de minimis exemption, in particular, has created a unique headwind, with $240 million in annual gross profit at risk [23].

Conclusion: A Cautious Buy or a Warning?

The selloff in Lululemon’s stock presents a nuanced case. On one hand, the company’s strong international growth, undervalued metrics, and strategic initiatives suggest long-term resilience. On the other, U.S. market challenges, inventory pressures, and margin compression warrant caution. Investors must weigh the potential for a rebound in international markets against the risk of prolonged domestic weakness. For those with a long-term horizon, the current discount may offer an entry point, but near-term volatility remains a concern.

Source:
[1] Lululemon CEO 'not satisfied' with Q2 results as profit declines, [https://ca.finance.yahoo.com/news/lululemon-reports-profit-fell-q2-203404724.html]
[2] Lululemon cuts forecasts, blames tariffs and product issues, [https://www.reuters.com/business/retail-consumer/lululemon-cuts-forecasts-blames-tariffs-product-issues-2025-09-04/]
[3] Lululemon (LULU) Q2 2025 earnings, [https://www.cnbc.com/2025/09/04/lululemon-lulu-q2-2025-earnings.html]
[4] Lululemon (LULU) Q2 Earnings: Taking a Look at Key Metrics, [https://finance.yahoo.com/news/lululemon-lulu-q2-earnings-taking-220002372.html]
[5] Lululemon Athletica Q2 FY2025 Earnings Call Transcript, [https://www.benzinga.com/markets/earnings/25/09/47512514/lululemon-athletica-q2-fy2025-earnings-call-transcript]
[6] Lululemon's Growth Strategy: International Expansion and Product Innovation, [https://monexa.ai/blog/lululemon-s-growth-strategy-international-expansio-LULU-2025-02-17]
[7] EXEC: Analysts Appear Skeptical of a Near-Term Return to, [https://sgbonline.com/exec-analysts-provide-look-ahead-for-lululemons-q2-report/]
[8] Jefferies reiterates Underperform rating on Lululemon stock, [https://www.investing.com/news/analyst-ratings/jefferies-reiterates-underperform-rating-on-lululemon-stock-amid-declining-us-business-93CH-4225657]
[9] Lululemon: There's Salvage Value Here As International Growth Steps Up - Upgrade, [https://seekingalpha.com/article/4819745-lululemon-theres-salvage-value-here-as-international-growth-steps-up-upgrade]
[10] Michael Burry Is Betting Big On Lululemon Stock, [https://www.barchart.com/story/news/34304782/michael-burry-is-betting-big-on-lululemon-stock-should-you]
[11] LULU Options are Pricing in a Massive Earnings Move, [https://marketchameleon.com/articles/i/2025/9/4/26801-lulu-options-are-pricing-in-a-massive-earnings-mov]
[12] Lululemon’s Hidden Growth Engine, [https://finance.yahoo.com/news/lululemons-hidden-growth-engine-why-134800935.html]
[13] lululemon Investment Research: a Full Deep Dive, [https://fluentinquality.substack.com/p/lululemon]
[14] Lululemon (LULU) Earnings Preview: Tariffs Weigh on, [https://www.tastylive.com/news-insights/lululemon-lulu-earnings-preview-tariffs-weigh-on-softening-retail-sector]
[15] Lululemon's Hidden Growth Engine - Yahoo Finance, [https://finance.yahoo.com/news/lululemons-hidden-growth-engine-why-134800935.html]
[16] lululemon Announces Five-Year Growth Plan to Double Revenue by 2026, [https://corporate.lululemon.com/media/press-releases/2022/04-20-2022-113017957]
[17] Does Lululemon's 45% Decline Signal a Turnaround, [https://finance.yahoo.com/news/does-lululemon-45-decline-signal-100617609.html]
[18] LULU Intrinsic Valuation and Fundamental Analysis, [https://www.alphaspread.com/security/nasdaq/lulu/summary]
[19] Lululemon's Stock Stumbles As Growth Slows And, [https://www.tradingnews.com/news/lululemon-stock-price-forecast-lulu-slumps-michael-burry]
[20] lululemon athletica inc. Announces First Quarter Fiscal 2025 Results, [https://corporate.lululemon.com/media/press-releases/2025/06-05-2025-210525682]
[21] Lululemon: The Pullback Fits - Carbon Finance, [https://www.carbonfinance.io/p/lululemon-q3-2025]
[22] Diverging Paths: Exploring Contrasting Performances in…, [https://www.euromonitor.com/article/diverging-paths-exploring-contrasting-performances-in-sportswear]
[23] Lululemon cuts forecasts ahead of holiday season on tariff, [https://www.reuters.com/business/retail-consumer/lululemon-cuts-forecasts-ahead-holiday-season-tariff-woes-weak-demand-shares-2025-09-04/]