lululemon Q1 Earnings & Revenues Beat, Stock Dips on Cost Outlook

Lululemon reported Q1 EPS of $2.60 and revenues of $2.37B, surpassing estimates with revenue growth of 7% year-over-year driven by international sales, particularly in China. Despite the earnings and revenue beat, LULU shares fell 22.4% after hours due to a revised outlook anticipating higher costs from increased tariffs on imports from China and Mexico and adverse currency rates, which are expected to negatively impact margins. The company now projects a 110 bps decline in gross margin for fiscal year 2025, compared to the previous guidance of a 60 bps decline.

Analysis

Lululemon (LULU) reported first-quarter fiscal 2025 results that surpassed consensus estimates for both earnings per share (EPS) and revenue, with EPS at $2.60 (a 2.4% year-over-year increase) and revenue reaching $2.37 billion (a 7% year-over-year rise, or 8% in constant currency). This top-line growth was significantly driven by strong international performance, particularly in Mainland China where revenue surged 21% (22% in constant currency), and overall international revenues grew 19% (20% in constant currency). Despite these positive results, LULU's stock experienced a sharp 22.4% decline in after-hours trading. This adverse reaction was primarily attributed to the company's revised cost outlook, which now anticipates greater pressure from increased import tariffs and unfavorable currency exchange rates. Consequently, Lululemon now projects a 110-basis-point year-over-year decline in its full-year fiscal 2025 gross margin, a more pessimistic forecast than the previously guided 60-basis-point contraction. While Q1 gross margin expanded 60 bps year-over-year to 58.3%, driven by lower product costs, the outlook for the second quarter anticipates a 20 bps gross margin decline and a significant 380 bps operating margin contraction year-over-year, highlighting the expected severity of these cost challenges. The Americas region showed modest revenue growth of 3% (4% constant-dollar) but experienced a 2% decline in comparable sales (1% constant-dollar), indicating potential softness in its largest market. SG&A expenses also rose 11.9% in Q1, increasing the SG&A rate by 170 bps to 39.8% of net revenues. Despite these headwinds, the company reiterated its full-year revenue guidance of $11.15-$11.3 billion and projects a slight increase in full-year EPS to a range of $14.95-$14.78, although inventory levels rose 17% year-over-year to $1.7 billion.

Key Decisions for Investors

• Investors should weigh the sharp stock pullback against the revised, weaker margin outlook driven by tariffs and FX headwinds, particularly the significant Q2 operating margin contraction guidance of 380 basis points.
• Closely monitor the company's execution of tariff mitigation plans, expected to be most effective in the second half of fiscal 2025, and upcoming comparable sales figures for the Americas, where a 2% Q1 decline signals potential vulnerability despite robust international growth.
• Consider the implications of the 17% year-over-year inventory increase to $1.7 billion and the company's ability to manage this alongside rising cost pressures without resorting to significant markdown activity that could further impact future gross margins.