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Lululemon Faces Rough Waters Despite Earnings Beat

Lululemon Athletica’s stock plummeted over 23% in after-hours trading on Thursday, even as the company exceeded expectations for its fiscal first-quarter earnings. The dramatic sell-off came after the apparel brand lowered its full-year earnings outlook, citing an increasingly “dynamic macroenvironment,” including shifting consumer behavior and heightened tariff pressures.

Despite this stumble, the Canadian-born athleticwear brand, which has built a cult following through premium activewear and lifestyle products, remains confident in its long-term strategy. CEO Calvin McDonald told analysts that the company is “playing offense” amid the turbulence by leveraging its financial strength and brand loyalty.

Key Financials for Q1 FY2025

Lululemon reported strong top-line and bottom-line figures for the quarter ending May 4:

• Earnings per share: $2.60 vs. $2.58 expected
• Revenue: $2.37 billion vs. $2.36 billion expected
• Net income: $314 million vs. $321 million a year earlier
• Revenue YoY growth: 7.2% (from $2.21 billion)
• Gross margin: 58.3% (above the 57.7% analyst consensus)
• Comparable sales growth: +1% globally (includes -2% in the Americas, +6% internationally)

While revenue grew, the drop in U.S. comparable sales raised concerns. McDonald acknowledged a “cautious and intentional” U.S. consumer, emphasizing that international markets continue to deliver solid growth.

Lowered Guidance Sparks Sell-Off

The sharp decline in stock price was fueled by the cut in full-year profit guidance. Lululemon now expects:

• Full-year EPS: $14.58 to $14.78
  (Previously: $14.95 to $15.15 | Analysts expected: $14.89)
• Full-year revenue: $11.15 to $11.3 billion (unchanged)
  (Analysts expected: $11.24 billion)
• Q2 revenue: $2.54 to $2.56 billion
• Q2 EPS: $2.85 to $2.90 (vs. $3.29 expected)

CFO Meghan Frank highlighted the role of tariffs in the revised earnings projections, stating that the company anticipates a 110 basis point decline in gross margin for the full year—wider than the previously forecasted 60 basis point drop.

Tariffs Force Strategic Price Adjustments

Lululemon plans to roll out modest price increases on select items starting late Q2 into Q3, in an effort to blunt the impact of escalating trade tariffs. These include:

• A 30% incremental tariff on imports from China
• A 10% tariff on other sourcing countries

According to the company’s 2024 annual report, Lululemon’s production footprint includes:

• Vietnam: 40%
• Cambodia: 17%
• Sri Lanka & Indonesia: 11% each
• Bangladesh: 7%

The company does not own manufacturing plants and depends entirely on third-party suppliers for both raw materials and finished products.

Industry Context: Retailers Brace for Tariff Impact

Lululemon isn’t alone in facing the pressure of rising costs and uncertain economic signals. Several retailers have revised their outlooks:

• Abercrombie & Fitch and Macy’s cut earnings guidance
• American Eagle withdrew its outlook entirely
• Gap Inc. warned that tariffs could cost them $100M to $150M
• Nike announced price hikes without explicitly tying them to tariffs

Despite the cloudy near-term picture, McDonald remains optimistic, noting, “We are better positioned than most to adapt quickly.”

Stock Performance and Investor Reaction

Before Thursday’s drop, LULU stock had already declined 13% year-to-date, reflecting broader investor caution. The 23% plunge following earnings further compounds investor concerns about retail exposure to inflation, tariffs, and a hesitant U.S. consumer base.

Looking Ahead

While Lululemon is actively managing short-term headwinds with strategic pricing and global diversification, the company faces a pivotal period. With U.S. demand slowing and trade dynamics in flux, much will depend on the success of its international expansion and pricing elasticity.

Investors will be closely watching how the brand performs in Q2 and whether its pricing power and operational agility can stabilize profitability.