While earnings will decline this year, Lululemon stock hasn't been this cheap in a very long time.
Athletic apparel retailer Lululemon (NASDAQ: LULU) was already facing multiple issues before U.S. tariff policy was turned on its head by the Trump administration. The company has been slow to innovate, and its stale product lines have opened the door to competition on multiple fronts. At the same time, younger consumers are moving away from the tight leggings that have defined Lululemon's brand.
The company's turnaround was going to be challenging no matter what, and now tariffs have increased the difficulty even further. Lululemon's second-quarter report was bad enough to send the stock down nearly 20% on Friday morning. Tariffs are turning into a huge headache for the company at the worst possible time.
Lululemon grew revenue by 7% year over year in Q2, but that growth was driven by new stores and success in international markets. Comparable sales in the Americas were down 4%. Gross margin dipped by 1.1 percentage points to 58.5% in the quarter, while earnings per share (EPS) declined slightly.
The rest of the year is going to be a slog. Lululemon cut its 2025 outlook due to trouble in its U.S. business. Total revenue is now expected to grow by just 2% to 4%, and EPS should come in between $12.77 and $12.97. Previously, the company had guided for 5% to 7% revenue growth and EPS between $14.58 and $14.78.
Tariffs are largely to blame for Lululemon's weak outlook. Most of Lululemon's products come from countries with tariff rates above the 10% baseline rate that was in force earlier this year. Products from Vietnam, for example, are now subject to a 20% tariff rate after a trade deal was reached over the summer.
The removal of the de minimis exception, which allowed small shipments to enter the U.S. without any duties, is also set to have a significant negative impact on Lululemon's operations. Most of Lululemon's sales to U.S. e-commerce customers are currently fulfilled from Canadian distribution centers, and many of those orders previously qualified for the de minimis exception. With the exception now gone, order fulfillment costs are set to rise.
Lululemon has some levers to pull that will partially mitigate these higher costs, including negotiating with vendors and raising prices. However, there's only so much the retailer can do. Lululemon expects tariffs and the removal of the de minimis exception to reduce its gross profit for the full year by around $240 million. For perspective, the company generated a gross profit of roughly $6.3 billion in 2024.