Lululemon's war with itself is over. The real fight has only just begun

LULULEMON'S war with itself is over. In May 2026 it settled its proxy battle with founder Chip Wilson, handing him two board seats in return for an 18-month promise not to disparage the company. A new CEO, Heidi O'Neill, a former executive at the equally troubled Nike, is due to start in September. The drama has, for now, been resolved.

The trouble is that drama was not the problem. It was the symptom.

The real story is what has been happening in the numbers. In its first quarter of fiscal 2026, which ended in May, Lululemon's gross margin collapsed by 4.1 percentage points to 54.2%. Selling, general and administrative expenses expanded by 3.1 percentage points to 42.9% of revenue. Earnings per share fell 35%, to $1.69 from $2.60. The stock, which peaked at $511 in late 2023, had lost nearly 63% of its value in the 12 months through early June 2026. On June 4th it fell another 11% in a single day after the company cut its full-year guidance below Wall Street's expectations.

These are not the numbers of a company suffering an identity crisis. They are the numbers of a company whose pricing power is evaporating and whose cost structure is swelling.

The American problem

Lululemon's largest market is also its weakest. Comparable sales in the Americas have fallen for five straight quarters, dropping 5% in the latest. That is the region where Lululemon built its moat: premium yoga pants at premium prices, sold in stores that feel more like wellness centres than retail outlets. The model worked when there was nowhere else to go.

Now there is. Alo Yoga and Vuori have captured the enthusiasm of younger consumers who were never loyal to Lululemon in the first place. The athleisure category, once a growth story, is now a crowded one. Lululemon's response - which was, until recently, to lean harder on promotions to move inventory - preserved sales but shredded margins. The company now plans to pull back from that strategy, accepting weaker near-term revenue in the hope of restoring full-price discipline. It is a sensible move. Whether shoppers will co-operate is another matter.

The Chinese cushion

To be sure, Lululemon's global story is not uniformly dire. China revenue surged 30% in the quarter, with comparable sales up 20%. International sales as a whole grew 22%. The brand is still expanding in markets where it has not yet saturated demand. That is genuine strength.

But China accounts for a fraction of total revenue. International markets, impressive as they are, cannot subsidise a collapsing core. The divergence is structural: Lululemon is becoming a growth company abroad and a declining one at home. That is not the trajectory of a brand in its prime.

The tariff tax

Overlaying the competitive problem is a policy one. Lululemon expects tariffs to cost it $380m on a gross basis in fiscal 2026, up from $275m the year before. Even after mitigation, the net hit will be $220m. The company has been negotiating with suppliers but has not raised prices, partly because it is already at the top of the market and partly because promotions are already doing the opposite of what price hikes would achieve.

Tariffs in this case are a genuine cost pass-through to the balance-sheet, not a trade-policy abstraction. They are structural, not cyclical. And they arrive precisely when margins are already under pressure from the commercial challenges described above.

The governance expression

All of which explains the proxy battle. Mr Wilson, who owns about 4.3% of the company, was not simply being difficult. He was reacting to a business whose fundamentals were deteriorating while the board appeared oblivious. The arrival of Elliott Management, with a stake of more than $1bn, confirmed that institutional investors shared the diagnosis. The board's eventual concession - two seats for Mr Wilson's nominees, an outgoing Advent International representative, a promise to add brand expertise - was not capitulation. It was triage.

Whether it is too little too late is the question the incoming CEO must answer. Ms O'Neill's task will be to reset the brand's creative direction, restore pricing power without losing customers to rivals, and manage a cost structure that includes a structural tariff burden the previous regime could not foresee. She inherits a company where gross margins have fallen by more than four points in a single quarter and where, as of the earnings report, the stock traded at a forward price-to-earnings ratio of 10, compared with 22.8 for Nike and 15.1 for Adidas.

That discount is not gratuitous. It reflects a market that has concluded Lululemon's best days as a high-growth, high-margin compounder are behind it. The question is whether they can be in front of it again.

The proxy war was a distraction. The commercial reality is not.

AInvest's aggregate signal labels Lululemon a Hold, reflecting the tension between a depressed valuation and unresolved execution risk. The stock's forward multiple would be cheap for a business that was merely cyclical. It is not cheap for one that is structural. The break condition is straightforward: if Ms O'Neill can restore Americas comparable sales to growth and stabilise gross margins above the low-50s, the current discount reflects too much pessimism. If she cannot, the discount will widen, not narrow. That is the bet investors are being asked to take.