Lululemon (LULU) Q3 2025: China Grows 46% as U.S. Sales Slide, Margin Pressure Intensifies

December 11, 2025 | By EarningsIQ Research

International momentum, led by China’s 46% growth, offset persistent U.S. weakness and mounting margin headwinds for Lululemon’s Q3 2025. The company outlined a multi-pronged action plan—product innovation, activation, and enterprise efficiency—to address domestic softness, but tariff and inventory challenges loom large into 2026. Leadership transition and a sharper focus on newness will define the company’s next phase as it navigates a shifting global athletic landscape.

Summary

• China Acceleration Outpaces U.S. Decline: International strength, especially in China, is now central to growth.
• Margin Compression Signals Cost Pressure: Tariffs and higher markdowns are eroding profitability, with more pain expected.
• Leadership Shift Sets New Strategic Course: CEO transition and co-CEO structure put product and operational execution in the spotlight for 2026.

Performance Analysis

Lululemon’s Q3 2025 results revealed a business increasingly bifurcated by region. While total net revenue rose to $2.6 billion, the Americas segment declined, with U.S. revenue down 3% and overall Americas revenue down 2%. In contrast, China mainland revenue surged 46% (47% in constant currency), now establishing China as the company’s second largest market and the primary engine of growth. The rest of world segment also delivered strong 19% growth, highlighting the company’s global expansion success.

Profitability, however, deteriorated sharply. Gross margin contracted by 290 basis points, driven by tariffs, higher markdowns, and unfavorable mix. Operating margin fell to 17% from 20.5% a year ago. Digital revenue climbed 13% and now comprises 42% of total sales, but this positive was offset by flat store sales and a 5% decline in comparable sales in the Americas. Inventory management remains challenged, with units up 4% and dollar inventory up 11%, reflecting higher tariff rates and FX impacts.

• China Delivers Outsized Growth: International revenue, especially China, is now the key growth driver, with China outperforming guidance and expectations.
• Americas Face Demand Headwinds: U.S. guest metrics are stable, but frequency and spend per high-value guest remain under pressure.
• Gross Margin Compression: Tariffs and markdowns drove a 290 basis point margin decline, with further pressure forecasted for Q4 and 2026.

Despite strong international performance, Lululemon’s core U.S. business is struggling to regain momentum, and margin headwinds from tariffs and markdowns are set to persist into next year.

Executive Commentary

Strategic Positioning

1. International Expansion as Growth Anchor

Lululemon’s international business, particularly China, is now the company’s primary growth engine. China’s revenue growth of 46% has outpaced all other regions, and management expects this trend to continue, with China likely to exceed the high end of its full-year guidance. The rest of world segment is also building momentum, with strong openings in Korea and Turkey and further market entries planned for 2026. This shift marks a structural pivot in Lululemon’s business model—from North America-centric to a diversified, global athletic brand.

2. U.S. Action Plan Focuses on Product and Experience

Management is prioritizing a three-pillar action plan to reignite U.S. growth: product creation (accelerated newness and innovation), product activation (in-store and digital experience upgrades), and enterprise efficiency (cost controls and tariff mitigation). The pipeline includes a push to raise new style penetration to 35% next spring and faster speed-to-market through improved design and supply chain agility. These efforts are aimed at increasing purchase frequency among high-value guests and restoring Lululemon’s U.S. momentum.

3. Margin Defense Amid Tariff and Markdown Pressures

Margin protection is now a core strategic imperative. Tariffs and the removal of the de minimis provision, de minimis, a duty-free import threshold, will drive a combined 410 basis point headwind in Q4 alone. Management is pursuing pricing actions, vendor negotiations, and supply chain reconfiguration, but acknowledges that margin deterioration will persist into 2026. The company’s balance sheet strength ($1 billion cash, no debt) provides flexibility, but cost structure and inventory discipline are under scrutiny.

4. Leadership Transition and Organizational Realignment

CEO Calvin McDonald’s planned departure at the end of January signals a new chapter. The interim co-CEO structure splits commercial and operational oversight, with product, merchandising, and design now reporting to CFO Megan Frank. The leadership team is tasked with executing the product pipeline and action plan already in motion, but the CEO search will be closely watched for its impact on strategic continuity and cultural alignment.

5. Digital and Membership Ecosystem

Digital remains a growth lever, now 42% of revenue, and membership initiatives are gaining traction. The recent website redesign and app-driven Black Friday promotions drove record e-commerce volume and new member signups. Partnerships, such as with Amex Platinum, are delivering new guest acquisition, although their financial contribution remains modest. These digital and loyalty programs are central to Lululemon’s omnichannel strategy and future guest engagement.

Key Considerations

This quarter’s results highlight a company at a strategic crossroads—international strength is masking domestic softness, and cost headwinds are intensifying.

Key Considerations:

• Tariff Impact Escalates: Tariffs and de minimis changes are structural, not transitory, and will continue to pressure gross margin into 2026.
• Inventory Management Tightens: Elevated inventory levels and higher markdown rates reflect cautious demand outlook and the need for more conservative planning.
• Product Newness as a Catalyst: The speed and success of new product launches will be critical to driving U.S. reacceleration and offsetting saturation in core franchises.
• Leadership Change Risks and Opportunities: CEO transition and interim structure could disrupt execution or accelerate innovation, depending on alignment and clarity.

Risks

Persistent U.S. demand softness, increased tariff and regulatory costs, and execution risk around the product refresh and leadership transition represent key threats. The company’s full-year margin outlook assumes successful mitigation of tariff impact and disciplined inventory management—any shortfalls could further erode profitability. International momentum, while strong, introduces geopolitical and competitive risks, especially in China.

Forward Outlook

For Q4 2025, Lululemon guided to:

• Revenue between $3.5 and $3.59 billion, representing a decline versus last year (excluding the 53rd week).
• Gross margin to decrease approximately 580 basis points, with tariffs and de minimis accounting for ~410 basis points of pressure.
• EPS in the range of $4.66 to $4.76, down from $6.14 a year ago.

For full-year 2025, management maintained guidance for:

• Revenue of $10.96 to $11.05 billion, up 4% year over year.
• Gross margin to decline ~270 basis points; operating margin to fall ~390 basis points.
• EPS of $12.92 to $13.02, down from $14.64 last year.

Management highlighted that the U.S. business will see modest improvement in Q4 but expects margin headwinds to intensify in 2026, with the negative impact of tariffs outweighing cost savings.

• Inventory units will be managed below sales to limit markdown risk.
• Full impact of new product initiatives will materialize in 2026, with early signs expected in Q1.

Takeaways

Lululemon’s Q3 underscores an accelerating international pivot, but margin and U.S. demand headwinds remain unresolved. Investors should focus on the execution of the product refresh, tariff mitigation, and leadership transition as key determinants of the company’s next phase of growth and profitability.

• International Outperformance: China’s 46% growth is now the primary growth engine, offsetting U.S. softness but raising exposure to new risks.
• Margin Erosion Persists: Tariff and markdown headwinds are structural, with management signaling further pressure into 2026.
• Product Pipeline and Leadership in Focus: The speed and effectiveness of new product launches, alongside stable leadership, will determine whether Lululemon can reignite U.S. growth and defend margins.

Conclusion

Lululemon’s Q3 2025 results highlight a business in transition—international strength is undeniable, but persistent U.S. weakness and margin compression demand urgent action. The company’s next chapter will hinge on the success of its product innovation cycle, cost discipline, and seamless leadership succession.

Industry Read-Through

Lululemon’s results underscore a broader athletic apparel trend: international expansion, especially in China, is becoming essential as North American growth matures and consumer behavior shifts toward value. Margin pressure from tariffs and regulatory changes is likely to impact the entire sector, especially brands with significant U.S. import exposure. The emphasis on product innovation and digital engagement is now table stakes, with speed-to-market and local relevance as key differentiators. Leadership transitions and organizational agility will separate winners from laggards as the industry navigates a more complex, margin-constrained environment in 2026 and beyond.

LULU Consumer Discretionary Apparel International Tariffs Product Innovation Omnichannel Leadership