Lululemon Shares Plunge as Tariff Concerns Mount

Athleisure Giant Faces Headwinds Despite China Growth

Lululemon athletica (LULU) is experiencing significant stock decline, falling nearly 50% from its peak, as investors react to slowing sales growth and increased costs related to international trade policies. The company’s first-quarter earnings report revealed challenges despite continued expansion.

Sales Slowdown and Margin Pressure

Recent financial results show comparable sales growth slowed to just 1%, with a 2% decrease in the Americas. While overall revenue increased 7% to $2.37 billion—meeting expectations—profitability is under pressure. Gross margin improved slightly to 58.3%, but operating income rose only 1% to $438.6 million, with operating margin declining to 18.5% due to rising expenses.

Earnings per share edged up to $2.60, slightly surpassing the predicted $2.59, but the outlook remains cautious. According to Statista, the global sportswear market is projected to reach $236.40 billion in 2024, highlighting the competitive landscape Lululemon navigates. (Statista, 2024)

Tariff Impact and Guidance Cuts

A key factor driving the stock’s downturn is the company’s guidance, influenced by the impact of tariffs. Lululemon management indicated that price increases to offset these tariffs would be limited and strategically implemented. Full-year revenue guidance remains at $11.15 billion to $11.3 billion, representing 6% growth, but earnings-per-share guidance has been reduced from $14.95-$15.15 to $14.58-$14.78.

“We still feel we’re early in our journey”

—Meghan Frank, CFO

The company anticipates a 160 basis point decrease in operating margin, further impacting earnings. Lululemon believes demand remains stable, suggesting the primary challenges stem from increased costs rather than reduced consumer interest.

China as a Growth Engine

Despite headwinds in North America, Lululemon continues to see substantial growth potential in China, its largest market for new store openings. First-quarter revenue in China increased 21% on 7% comparable sales growth, accounting for 13% of total revenue last year. The company’s success in China mirrors that of other popular American brands like Apple, Starbucks, and Nike, benefiting from a strong brand reputation and a culture of aspirational consumption.

Lululemon currently operates 154 stores in China, 20% of its total store count, and expects to exceed its initial goal of 200 stores.

Is Lululemon Still a Buy?

The tariff challenges faced by Lululemon are common within the apparel sector and may not be a long-term concern, especially given the potential for trade policy changes. With the stock now trading at a forward P/E of 18 following the guidance cut and recent sell-off, analysts suggest it presents a compelling investment opportunity.

Despite potential short-term volatility, Lululemon’s brand strength, historical growth, and expansion opportunities in China position it for future success. Investors may need patience as trade dynamics evolve, but the current price appears attractive.