Lululemon Q1 2025 Earnings Update

Lululemon's stock is down over 20% after hours due to disappointing guidance, despite a mostly acceptable quarter. While US growth is in the low single digits, a 2% comparison in Q1 2024 makes this performance particularly concerning. Additionally, inventory growth of 23% exceeded the previously guided high-teens growth, and markdowns are expected to increase by 10-20 bps YoY throughout the year.

Analysis

Lululemon's (NASDAQ:LULU) stock experienced a significant after-hours decline, exceeding 20%, primarily driven by disappointing forward guidance rather than the reported quarter's performance, which was described as mostly satisfactory. A key concern is the reversion to low single-digit growth in the US market, a development made more acute by the relatively low comparative baseline of just 2% growth in Q1 2024. Further compounding concerns, inventory levels surged by 23%, notably higher than the high-teens growth rate guided in the Q4 2024 call, which management attributed to a strategy of chasing a 'newness mix'. While current markdowns are down 10 basis points year-over-year, the company anticipates an increase of 10-20 basis points over the course of the year, signaling potential pressure on gross margins. This combination of slowing US growth, higher-than-expected inventory build, and anticipated increases in promotional activity has evidently unsettled investors, reflected in the strongly negative sentiment and substantial market impact.

Key Decisions for Investors

• Investors should critically reassess Lululemon's near-term growth prospects in the US market given the deceleration despite a favorable comparison period.
• Closely monitor upcoming earnings reports for progress on inventory management, as the current 23% growth significantly outpaces guidance and could lead to increased markdown activity, potentially eroding gross margins.
• Given the sharp negative stock reaction and pessimistic guidance, a cautious stance may be warranted until there is greater clarity on the company's ability to re-accelerate growth and manage inventory effectively without heavily resorting to promotions.