Athletic apparel retailer Lululemon (NASDAQ: LULU) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 7.1% year on year to $2.57 billion. On the other hand, next quarter’s revenue guidance of $3.54 billion was less impressive, coming in 0.7% below analysts’ estimates. Its GAAP profit of $2.59 per share was 17.1% above analysts’ consensus estimates.

Is now the time to buy LULU? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Lululemon’s third quarter was met with a strong positive market reaction, reflecting investor confidence in its underlying business trends. Management attributed the outperformance to robust international growth, particularly in China, where revenue climbed sharply. CEO Calvin McDonald highlighted the company’s continued success in broadening its product pipeline and expanding its global footprint, stating, “We have broadened our global reach from 18 to over 30 geographies and grown the company's China Mainland business into our second largest market.” Despite some softness in North America, the company credited technical innovation and strong outerwear demand for supporting performance activities.

Looking forward, management’s guidance is shaped by cautious U.S. consumer behavior and significant operational headwinds, including higher tariffs and inventory management challenges. CFO Meghan Frank stated, “It is fair to assume that the negatives will outweigh the positives” as the business faces its first full year of increased tariffs and ongoing investments in marketing and store experience. Lululemon is focusing on accelerating product innovation, enhancing digital and store experiences, and deploying targeted marketing, especially as new leadership steers the company through a key transition period.

Key Insights from Management’s Remarks

Management credited international strength, product innovation, and targeted marketing efforts for driving third-quarter performance, while calling out U.S. demand softness and margin pressures as key challenges.

• Leadership transition announced: CEO Calvin McDonald will step down, with Meghan Frank and Andre Maestrini named interim co-CEOs. Management emphasized that the existing product pipeline and strategic plans will not be disrupted by this change.

• China and international strength: China Mainland revenue surged, driven by successful product activations, low discounting, and strong response to outerwear. New store openings in Seoul and Istanbul reflect expansion into high-growth markets, with management expecting continued momentum outside North America.

• U.S. softness persists: North American revenue declined, with management attributing the weakness to lower visit frequency among high-value guests. Initiatives to increase newness and improve in-store curation are underway but expected to impact results primarily in 2026.

• Product innovation pipeline: Lululemon is accelerating new product introductions, particularly in performance categories like run and train, with a goal to have 35% new styles by next spring. Innovations such as updated fabrics and expanded men’s offerings are already seeing encouraging early results.

• Margin pressure from tariffs and markdowns: Higher tariffs and increased markdowns weighed on gross margin. Management has implemented supply chain and pricing strategies to offset some of these impacts, but expects continued margin headwinds as the company invests in marketing and brand building.

Drivers of Future Performance

Management expects international growth, product innovation, and operational adjustments to offset headwinds from tariffs and U.S. traffic softness in the coming quarters.

• International expansion to drive growth: Management anticipates continued momentum in China and other international markets, with new store openings and localized marketing campaigns supporting double-digit revenue growth outside North America.

• Product refresh and guest engagement: An accelerated product development cycle and more frequent new style launches are expected to improve engagement, particularly among high-value guests. Management aims to increase full price penetration and reduce markdown exposure by leveraging enhanced digital and in-store merchandising.

• Tariffs and operational efficiency risks: Elevated tariffs and the removal of the de minimis import provision remain major headwinds for operating margin. Management is pursuing vendor negotiations, network optimizations, and selective pricing actions to mitigate these cost pressures, but acknowledges that the negative factors are likely to outweigh the positives over the next year.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will closely watch (1) signs of traffic and full-price sales improvement in North America, (2) the effectiveness of new product launches in boosting guest engagement and spend, and (3) progress in offsetting tariff-driven margin pressures through supply chain and pricing initiatives. The pace of leadership transition and execution on international expansion will also be critical to monitor.

Lululemon currently trades at $206.84, up from $187.50 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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