Q2 2025 Earnings Summary
- Continued investment in international markets, which are performing well and are key to long-term strategy; for example, in China Mainland, revenue increased 34% (or 37% in constant currency).
- Reorganization of product teams to balance design and merchandising is expected to lead to more creative products and better alignment, driving future growth; the company achieved a 24% CAGR over the last 5 years, growing to $10 billion in revenue.
- Strong operating margin, which remains 100 basis points above 2020 results; the company is focused on optimizing the bottom line and is committed to their Power of Three x2 plan for modest operating margin expansion over the 5-year period.
- Lululemon is experiencing a slowdown in its U.S. women's business due to a significant reduction in product newness, which has impacted conversion rates as guests lacked new options to purchase. This issue stems from earlier product decisions, and the company anticipates returning to historical levels of newness no later than spring 2025.
- Analysts are concerned that Lululemon's gross margin rate may have peaked and SG&A expenses may need to increase, potentially pressuring operating margins. While management reiterates commitment to modest operating margin expansion over their five-year plan, they acknowledge it's too soon to provide a fine point on the outer years.
- Inventory levels are expected to increase by mid-teens in Q3 and slightly above that in Q4, which may raise the risk of overstocking and potential markdowns if demand does not improve, especially in the women's segment where sales have slowed.
-
Revenue Guidance
Q: Is revised guidance mostly impacting Q4?
A: Meghan Frank explained that the relationship between Q3 and Q4 guidance hasn't changed. They are guiding the second half in line with Q2 trends. Adjustments in Q4 account for a shorter holiday selling period, estimated at about a 3-point impact, as well as macroeconomic factors and the upcoming election. Overall, they have lowered their outlook for the second half. -
Revenue Shortfall Causes
Q: Is revenue miss due to internal issues or macro?
A: Calvin McDonald attributed the shortfall to decisions within their control, specifically gaps in newness in women's products. Traffic was positive, but they missed opportunities in conversion due to a lack of product newness. He sees this as an opportunity for improvement. -
Margin Outlook
Q: Are gross margins peaking; will SG&A rise?
A: Meghan Frank stated they are delivering gross margin relatively in line with 2023 and approximately flat SG&A, despite revenue growth guidance of 6–7% excluding the 53rd week. Operating margin remains strong, 100 basis points above 2020 results after two years. They remain committed to modest operating margin expansion over their five-year plan. -
China Growth
Q: How is China performing; any macro impact?
A: Meghan Frank reported very strong growth in China, with sales up 37% on a constant currency basis in Q2. The growth variance from Q1 was due to the shift in Chinese New Year. Calvin McDonald remains excited about the potential in China, noting their small store base of 132 and no material macro impact observed. -
Inventory Levels
Q: Are you comfortable with inventory levels?
A: Meghan Frank said inventory was down 14%, in line with expectations. While overall levels are comfortable, there's an opportunity to adjust the composition to increase newness. Markdown levels came in favorable, flat year-over-year in Q2. -
Product Innovation
Q: Timing for new Breathe Through products?
A: Calvin McDonald stated that while the Breathe Through fabric resonated well with consumers, new fits won't return until 2025. They are excited about upcoming product launches in training and seasonal updates to core styles, expecting newness to ramp up through Q3 and Q4, returning to historical levels by spring 2025. -
U.S. Women's Trends
Q: Any change in U.S. women's customer behavior?
A: Calvin McDonald observed no significant change in guest profile. The opportunity was with existing guests; conversion issues stemmed from gaps in product newness, particularly in colors, prints, and silhouettes. Guests were visiting and ready to spend, but the lack of newness affected sales. -
Accessories Performance
Q: How are accessories performing?
A: Calvin McDonald reported that accessories grew 7% in the quarter. The Everywhere Belt Bag remains a strong driver, and they continue to introduce new styles. Accessories represent 10% of their overall mix, with significant growth potential as they currently hold about 1% market share.
Research analysts covering lululemon athletica.