Is lululemon's Earnings Outlook Still Aligned With Its Growth Story?

Lululemon (LULU) reported mixed second-quarter fiscal 2025 results, with EPS topping estimates but revenues slightly missing, and significantly lowered its fiscal 2025 revenue and EPS guidance. This downward revision is primarily driven by persistent U.S. market softness, product cycle missteps in core categories, and an anticipated $240 million impact from rising tariff costs and the removal of the U.S. de minimis exemption, which is expected to reduce gross margins by 300 basis points. While international growth remains robust, the company faces a near-term period of slower growth and tighter margins, with turnaround benefits not fully materializing until fiscal 2026, contributing to a 56.7% year-to-date share decline and a Zacks Strong Sell rating.

Analysis

Lululemon's second-quarter fiscal 2025 results signal a significant recalibration of its growth narrative, as a slight revenue miss and soft domestic trends were overshadowed by a material downward revision to its full-year guidance. Management trimmed its fiscal 2025 outlook to revenues of $10.85-$11 billion and EPS of $12.77-$12.97, with the latter representing a sharp decline from $14.64 in fiscal 2024. This guidance cut is attributed to two primary factors: persistent weakness in the U.S. market, driven by acknowledged product cycle missteps in key casual categories, and significant external cost pressures. Specifically, the removal of the U.S. de minimis exemption and higher tariffs are expected to compress gross margin by 300 basis points, equivalent to a $240 million impact. While the company's turnaround strategy involves increasing new style penetration from 23% to 35% by spring 2026, management has indicated that the benefits will not fully materialize until fiscal 2026, leaving the near-term outlook vulnerable. Strong international performance, with revenue growth of 25% in China and 19% in the Rest of World, provides a partial offset but is insufficient to counter the domestic slowdown and margin headwinds. The market has reacted severely, with shares down 56.7% year-to-date, and the stock now trades at a forward P/E of 10.89x, below the industry average, reflecting diminished growth expectations and a Zacks Rank of #5 (Strong Sell).

Key Decisions for Investors

• Investors should anticipate continued near-term pressure on the stock, as the company's lowered guidance and the expected 300 basis point gross margin erosion from tariffs will weigh on fiscal 2025 results.
• The significant share price decline may offer a valuation argument for long-term holders, but any new position should be contingent on tangible evidence of a U.S. turnaround, as the benefits of the product refresh are not expected until fiscal 2026.
• Monitor U.S. sales trends and commentary on new product performance in subsequent earnings reports as critical indicators of whether the brand can reignite engagement with its core customer base.
• Given the strong performance of competitor Ralph Lauren, investors should evaluate whether Lululemon's challenges are company-specific execution issues or a broader shift in consumer preference within the athleisure sector.