lululemon Q4 Earnings & Revenues Beat, Margin Pressures Persist

lululemon reported Q4 FY2025 EPS of $5.01, down 18.4% YoY but above the $4.77 consensus; revenue was $3.64B, up 1% YoY (flat in constant dollars) and beat the $3.58B estimate. Gross margin contracted 550 bps to 54.9% (tariffs ≈ -520 bps, markdowns +130 bps) and SG&A rose to 32.5% of sales, driving operating income to ~$812M (down ~22%). Guidance: FY2026 revenue $11.35–$11.5B (2–4% growth), EPS $12.10–$12.30 vs $13.26 LY, gross margin down ~120 bps, capex $725–$745M; share repurchases continue with $1.2B remaining under the program.

Analysis

The dominant near-term driver is margin volatility from tariffs, markdowns and front-loaded brand investments — a recipe for bumpier quarterly EPS even if top-line pace stabilizes. Because LULU chose to prioritize full-price recovery over short-term sell-through, expect continued SG&A volatility from concentrated marketing and event spending; that increases the probability of sequential misses in the next 1-2 quarters even if the strategy is correct over 12-24 months.

China’s outperformance is a structural positive but also a double-edged sword: strong international comps will mask North American healing (or lack thereof), compressing read-throughs for peers and making headline comparisons noisier. That geographic mix shift should support valuation resiliency vs. pure North American peers, but it concentrates execution risk in one region — any China macro reacceleration rollback would quickly unwind the apparent recovery.

The elevated inventory position plus ongoing buybacks creates an asymmetric capital-allocation risk: buybacks prop up the multiple today but reduce the firm’s tactical flexibility to absorb markdown-led working-capital shocks. Combine that with a proxy contest and discrete event-related costs in H1, and you get a higher chance of a step-down in buyback cadence if near-term cash conversion weakens.

Catalysts to watch over 0-18 months: Q1 print (tariff realization and SG&A cadence), sequential markdown trajectory (units vs dollars), China sales sustainability post-promo windows, and any announced sourcing/nearshoring shifts that materially lower the tariff run-rate. These determine whether LULU’s guidance path (mid-single-digit growth and margin recovery) is credible or optimistic.

Key Decisions for Investors

• Tactical short LULU into Q1 (0-3 months): buy a cost-defined put spread (e.g., Jun-2026 put debit spread) sized as 1-2% portfolio risk — rationale: H1 SG&A cadence and tariff headwinds likely compress EPS; target 20-30% downside in implied recovery case, max loss = premium paid.
• Pair trade (6-12 months): long RL / short LULU — equal notional. RL’s cleaner margin upside and lower tariff sensitivity should outperform if consumers rotate back to premium lifestyle brands; target 15-25% relative outperformance, stop if pair diverges >15% adverse.
• Long COLM (6-12 months): buy equity or calls as a cheaper, less tariff-exposed exposure to outdoor/active consumer — upside from inventory discipline and easier margin leverage while LULU digests its repositioning. Size modest (1-3% portfolio).
• Convex recovery play (12-18 months): buy LULU longer-dated call spread (Jan-2027) to capture mean reversion in full-price mix funded by selling nearer-term premium (e.g., Jun calls). Rationale: limits front-loaded pain while keeping upside participation if brand re-accelerates; defined risk with asymmetric upside.