Lululemon slashes EPS forecast, dragging down European retail stocks

Lululemon (LULU) shares plunged over 21% pre-market after the company lowered its fiscal 2025 EPS guidance to $14.58-$14.78, citing tariff pressures and a projected 160 basis point decline in EBIT margin; the revision triggered a selloff in European sports retailers like Adidas and Puma. The guidance cut follows mixed Q1 results, including slowing growth in the critical China market (revenue up 21% vs. 46% in Q4) and a 2% decline in Americas comparable store sales, compounded by rising SG&A expenses and a 23% increase in inventory outpacing sales growth.

Analysis

Lululemon Athletica has revised its fiscal 2025 earnings per share guidance downwards to a range of $14.58 to $14.78, a reduction from the previous $14.95 to $15.15, primarily attributing this to an anticipated 160 basis point contraction in EBIT margin stemming from tariff-related pressures. This announcement precipitated a significant pre-market decline of over 21% in Lululemon's shares and also exerted downward pressure on European sports retailers such as Adidas and Puma, which saw their shares fall by nearly 1%. The guidance adjustment follows a mixed first-quarter performance characterized by several headwinds. In the Americas, revenue increased by a modest 3%, but comparable store sales contracted by 2% year-over-year, continuing a negative trend from previous quarters and indicating persistent weakness in the U.S. market exacerbated by declining mall foot traffic. Furthermore, growth in China, a critical market, demonstrated notable deceleration, with first-quarter revenue growth slowing to 21% from 46% in the prior quarter, and comparable store sales growth falling to 7% from 26% and 27% in the preceding quarters. Operational challenges also contributed to the revised outlook, with selling, general, and administrative (SG&A) expenses rising by 160 basis points to 40% of revenue, surpassing expectations; the company anticipates continued SG&A deleverage due to factors like increased store labor costs. Compounding these issues, inventory levels surged 23% year-over-year, significantly outpacing the 7% sales growth, which suggests a heightened risk of increased markdown activity to manage excess stock. Despite these concerns, some analysts, like TD Cowen, view the substantial share price reaction as "extreme," maintaining a "buy" rating and highlighting that the EPS revision itself is relatively small at 2.5%, with a long-term price target of $200 still in place.

Key Decisions for Investors

• Acknowledge Lululemon's significant near-term challenges, including margin pressure from tariffs, decelerating growth in key regions like the Americas and China, rising SG&A expenses, and a 23% inventory surge, which prompted the EPS guidance cut and a sharp stock decline.
• Consider the contrarian analyst perspective suggesting the stock's sell-off is 'extreme' and that the 2.5% EPS revision is modest; however, any potential investment should be weighed against the need for improved execution in areas like inventory management and cost control, alongside an easing of macroeconomic and tariff pressures.
• Monitor the broader athletic apparel sector for contagion effects from Lululemon's update, but evaluate peers such as Adidas and Puma based on their distinct fundamentals and specific exposure to U.S. consumer demand and tariff-related issues.