The shares of Lululemon had declined after releasing its quarterly results and outlook. The drop in their shares shocked many investors who were expecting high performers from the company. For those who have been wondering why a stock like Lululemon dropped every minute after the announcement, here is an explanation.
Why did Lululemon stock drop so much?
The main reason Lululemon stock fell is because the company gave a much weaker outlook for the year than Wall Street expected.
- Lululemon expects full-year earnings between $12.77 and $12.97 per share, compared to analyst estimates of $14.45 per share.
- The company also forecast full-year revenue of $10.85 to $11 billion, which is lower than the $11.18 billion analysts had projected
Investors reacted quickly to the disappointing forecast, sending shares down about 20% in extended trading.
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How did tariffs impact Lululemon’s profits?
One of the biggest challenges facing Lululemon right now is the impact of tariffs. The company said U.S. tariffs could cut profits by $240 million this year alone.
CEO Calvin McDonald explained, “We are facing yet another shift today within the industry related to tariffs and the cost of doing business. The increased rates and removal of the de minimis provisions have played a large part in our guidance reduction for the year.”
The removal of the de minimis exemption, which previously allowed smaller shipments to avoid tariffs, is now adding significant costs. Chief Financial Officer Meghan Frank said that this change represents roughly 1.7 percentage points of the 2.2 percentage-point tariff-related decline in profit expected this year.
What were Lululemon’s quarterly results?
Even though the full-year outlook was poor, the company still managed to beat expectations for second-quarter earnings:
- Earnings per share: $3.10 vs. $2.88 expected
- Revenue: $2.53 billion vs. $2.54 billion expected (slightly below expectations)
- Net income: $370.9 million, down from $392.92 million last year
- Gross margin: 58.5%, a drop of 1.1 percentage points
- Operating margin: 20.7%, a decline of 210 basis points
Sales also showed signs of weakness. Same-store sales in the Americas fell 4%, while overall comparable sales rose just 1%, below Wall Street’s 2.2% estimate.
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What product challenges is Lululemon facing?
Beyond tariffs and costs, Lululemon is struggling with its product strategy in the U.S. Calvin McDonald admitted that the company has allowed its product lifecycles to “run too long,” especially in its lounge and casual categories.
He explained, “We have become too predictable within our casual offerings and missed opportunities to create new trends. Our lounge and social product offerings have become stale and have not been resonating with guests.”
To fix this, the company plans to:
- Increase new styles from 23% of its assortment to 35% by next spring.
- Improve fast-track design capabilities to keep up with changing customer trends.
- Avoid making short-term decisions that could hurt the brand’s image in the long run.
What does this mean for investors?
For now, Lululemon stock has dropped more than 45% this year. The weak outlook, tariff pressure, and product challenges have all weighed heavily on investor confidence.
Still, the company is not giving up. McDonald stressed, “We are not satisfied with the results for the quarter, and we know our brand can and will perform better than these results.”
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