Lululemon (LULU) Q2 2025: Tariff Impact Drives 300bps Margin Decline as U.S. Sales Stall
Lululemon’s Q2 underscored a pivotal reset as U.S. growth stalled and tariff headwinds forced margin guidance sharply lower. The company’s response involves a major product overhaul, supply chain agility push, and a new technology leadership hire, though benefits will not materialize until 2026. Investors must weigh the near-term margin compression against management’s conviction in a product-driven recovery and international momentum.
Summary
- Tariff Shock Reshapes Margin Structure: Increased tariffs and removal of the de minimis exemption drove a significant margin reset.
- U.S. Product Fatigue Stalls Growth: Overreliance on legacy lounge and social franchises led to weak U.S. sales and higher markdowns.
- International Expansion Remains Resilient: China and rest-of-world segments continue to deliver robust double-digit growth, offsetting some North American weakness.
Performance Analysis
Lululemon’s Q2 results exposed a stark divergence between international strength and U.S. softness, with total revenue up 7% but falling short of guidance as North American sales stagnated. Comparable sales in the Americas declined 3%, with U.S. revenue flat and Canada up just 1%. The underlying pressure stemmed from sluggish demand for core lounge and social products, which make up 40% of the assortment, while performance apparel (60% of mix) continued to gain share even as the broader activewear market contracted.
Gross margin contracted 110 basis points in Q2, primarily due to higher markdowns and the initial impact of tariffs, with management warning of a full-year decline of approximately 300 basis points—nearly triple prior guidance. Tariffs and the removal of the de minimis e-commerce exemption together account for 220 basis points of this decline, a substantial structural change for Lululemon’s P&L. Inventory growth outpaced sales, up 21% in dollars and 13% in units, as the company managed through excess seasonal product. Digital sales grew 9% and now represent 39% of revenue, but markdown-driven clearance weighed on profitability.
- Americas Underperformance: U.S. comparable sales dropped as legacy casual products lost relevance, driving higher clearance activity.
- China and International Outperformance: China revenue rose 25% and rest-of-world climbed 19%, with continued store openings and brand activations fueling momentum.
- Margin Volatility: Tariff and supply chain cost increases, coupled with elevated markdowns, compressed gross and operating margins well below prior expectations.
Management’s focus now pivots to product innovation, supply chain agility, and expense discipline, while near-term performance is clouded by macro, competitive, and cost headwinds.
Executive Commentary
"We have let our product life cycles run too long within many of our core categories, particularly in lounge and social. We have become too predictable within our casual offerings and missed opportunities to create new trends... The increased rates and removal of the de minimis provision have played a large part in our guidance reduction for the year."
Calvin McDonald, Chief Executive Officer
"We are navigating increased costs related to tariffs and the removal of the de minimis exemption. We are taking actions in both the near-term and long-term to mitigate the increased tariff costs, including strategic pricing actions, supply chain initiatives, including vendor negotiations, and enterprise-wide expense savings initiatives."
Megan Frank, Chief Financial Officer
Strategic Positioning
1. Product Rejuvenation and Merchandising Reset
Lululemon is executing a product overhaul, shifting its assortment to 35% new styles by Spring 2026 (from 23% currently), with a focus on reinvigorating lounge and social categories that have turned stale. The new creative team, led by Jonathan Chung, is tasked with infusing innovation and trend-setting energy, targeting both new and long-term loyal guests. Early launches like Daydrift and Be Calm have gained traction, but the bulk of the assortment transformation will not reach scale until next year.
2. Supply Chain Agility and Technology Investment
Management is prioritizing faster go-to-market processes to enable quicker response to consumer demand. Initiatives include vendor pre-positioning of fabrics and a fast-track design process, reducing lead times by several months for select styles. The hiring of a Chief AI and Technology Officer signals a push to leverage technology and AI to enhance product innovation, assortment agility, and personalized guest experiences.
3. International Expansion as Growth Engine
While the U.S. faces headwinds, China and rest-of-world remain growth drivers. China delivered 25% revenue growth, with five new stores and continued brand activations. Lululemon is expanding into new markets (Italy, Turkey, Belgium, and soon India), and international square footage growth is set to outpace North America. The company’s playbook of community engagement and brand-building has proven adaptable across geographies.
4. Margin Management and Cost Mitigation
Tariffs and the loss of the de minimis exemption have forced a reset in margin expectations. Lululemon is pursuing a blend of modest price increases (primarily in the U.S.), vendor negotiations, and enterprise expense controls to offset cost pressures. However, management is explicit that brand health and long-term positioning will not be sacrificed for near-term margin recovery.
5. Capital Allocation and Store Productivity
Despite margin headwinds, capex discipline remains, with lower full-year spending and a focus on high-return store openings and optimizations. Share buybacks continue, with $860 million remaining under the current authorization. Store productivity and new market entries are expected to drive incremental guest acquisition and brand awareness, especially outside North America.
Key Considerations
Lululemon’s current reset is driven by both internal execution gaps and external cost shocks. The company’s ability to restore U.S. momentum hinges on product innovation, supply chain speed, and margin management while leveraging international tailwinds.
Key Considerations:
- Tariff and De Minimis Risk: Margin reset is structural, with $320 million impact expected in 2026; mitigation will be partial at best.
- Product Lifecycle Management: Overreliance on legacy franchises exposed the business to consumer fatigue; newness is now a top priority.
- International Diversification: China and rest-of-world growth provide a buffer, but macro and competitive risks persist in all regions.
- Inventory and Markdown Discipline: Elevated inventory and higher markdowns signal inventory risk if new product launches underperform.
- Technology and AI Leverage: New leadership and process investments are intended to drive long-term agility but will not impact near-term results.
Risks
U.S. demand softness and product fatigue present ongoing risk to sales and margin recovery, even as new styles are introduced. Tariff volatility and the loss of de minimis status create lasting cost headwinds, with only partial mitigation available through pricing and supply chain actions. Inventory growth ahead of sales could force further markdowns if new launches disappoint, while international momentum could moderate if macro or consumer trends weaken.
Forward Outlook
For Q3, Lululemon guided to:
- Revenue of $2.47 to $2.5 billion (3% to 4% growth)
- Gross margin decline of 410 basis points year-over-year, with 230 basis points attributed to tariffs and de minimis
- EPS of $2.18 to $2.23, down from $2.87 last year
For full-year 2025, management lowered guidance:
- Revenue of $10.85 to $11 billion (2% to 4% growth)
- Gross margin to decrease ~300 basis points
- EPS of $12.77 to $12.97 (down from $14.64 in 2024)
Management emphasized that the most meaningful impact from product and process changes will materialize in 2026, and that mitigation of tariff-related margin pressure will be only partial in the near term.
- Product assortment reset will scale in Spring 2026
- Tariff and supply chain mitigation levers will be fully deployed next year
Takeaways
Lululemon’s Q2 marked a decisive inflection as cost shocks and U.S. product fatigue forced a reset in growth and margin expectations. The company’s long-term opportunity remains intact, but near-term results will be pressured by both internal and external headwinds.
- Margin Structure Reset: Tariffs and the removal of de minimis have permanently altered Lululemon’s margin profile; mitigation will be gradual and incomplete.
- Product and Supply Chain Overhaul: The core U.S. business requires a new playbook, with meaningful newness and faster response to consumer trends now critical for recovery.
- Watch for 2026 Inflection: Investors should monitor the execution of the product reset, supply chain agility gains, and international expansion as leading indicators of a potential turnaround.
Conclusion
Lululemon faces a challenging transition as margin headwinds and U.S. demand softness collide, but management’s strategic reset is underway. The next twelve months will test the company’s ability to adapt, with 2026 positioned as the earliest point for a full recovery. Investors must weigh the near-term pain against the potential for a revitalized, globally diversified growth engine.
Industry Read-Through
Lululemon’s quarter is a cautionary signal for premium apparel peers: Overreliance on legacy products and slow assortment refresh can quickly erode brand momentum, especially as consumer preferences shift and competition proliferates. The tariff and de minimis changes are a structural margin headwind for all U.S. importers, with limited pricing power to offset the full impact. Supply chain agility, technology investment, and international diversification are emerging as critical levers for resilience. Brands with slow innovation cycles or heavy U.S. exposure face heightened risk as cost structures reset and consumer demand remains volatile.