$ AAPL

$ ABBV

$ ABNB

$ ACGL

$ ADI

$ ADM

$ ADP

$ ADSK

$ AEE

$ AEP

$ AES

$ AFL

$ AIG

$ AIZ

$ AJG

$ AKAM

$ ALB

$ ALGN

$ ALL

$ AMAT

$ AMCR

$ AMD

$ AME

$ AMGN

$ AMP

$ AMT

$ AMZN

$ ANET

$ AOS

$ APA

$ APD

$ APO

$ APTV

$ ARE

$ ATO

$ AVB

$ AVGO

$ AWK

$ AXON

$ BA

$ BALL

$ BAX

$ BBY

$ BDX

$ BEN

$ BG

$ BIIB

$ BKNG

$ BLDR

$ BMY

$ BR

$ BRO

$ BXP

$ CAG

$ CAH

$ CARR

$ CAT

$ CBOE

$ CBRE

$ CCL

$ CDNS

$ CDW

$ CEG

$ CF

$ CHD

$ CHRW

$ CI

$ CINF

$ CL

$ CLX

$ CMCSA

$ CMG

$ CMI

$ CMS

$ COIN

$ COO

$ COP

$ COR

$ CPAY

$ CPB

$ CPRT

$ CPT

$ CRL

$ CRM

$ CRWD

$ CSCO

$ CTRA

$ CTSH

$ CTVA

$ CVS

$ CVX

$ CZR

$ DAL

$ DASH

$ DAY

$ DD

$ DDOG

$ DE

$ DELL

Lululemon faces ongoing U.S. sales softness and margin pressure, but international growth and targeted price increases may help offset near-term headwinds in Q2 FY2025.

# lululemon athletica inc.: Navigating Margin Pressures and International Momentum—Q2 FY2025 Earnings Outlook

## Executive Summary: Cautious but Resilient Amid Margin Headwinds

We maintain a **Neutral** outlook for lululemon athletica inc. heading into Q2 FY2025. While **international revenue growth remains robust (+19% YoY in Q1 FY2025)**, persistent U.S. comparable sales declines (**-2% in Q1**) and elevated inventory levels (**$1.7B, +23% YoY**) are likely to weigh on near-term profitability. Management’s guidance for **Q2 revenue of $2.54B–$2.56B and EPS of $2.85–$2.90** sits below consensus, reflecting ongoing margin pressure from tariffs and discounting. The market may be underestimating the potential for **strategic, modest price increases** to partially offset these headwinds, but execution risk remains high given the current U.S. demand environment.

## Recent Trends Signal What’s Next: Margin Compression and International Outperformance

lululemon’s last two quarters highlight a clear divergence: **international markets are accelerating** while the U.S. core is softening. In Q1 FY2025, **total revenue grew 7% YoY**, but gross margin contracted by **~110bps** due to tariffs and increased markdowns. Operating margin also declined, reflecting higher SG&A and promotional activity. The following table summarizes the last four quarters’ key financials, illustrating the margin compression trend:

### Quarterly Financial Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS   |
|--------------|--------------|------------------|----------------------|---------------|-------|
| Q2 FY2024    | 2.21         | 58.8             | 22.1                 | 16.5          | 2.68  |
| Q3 FY2024    | 2.20         | 58.2             | 21.7                 | 16.2          | 2.53  |
| Q4 FY2024    | 3.21         | 58.0             | 22.0                 | 16.7          | 4.29  |
| Q1 FY2025    | 2.21         | 57.7             | 20.9                 | 15.8          | 2.54  |

**Key takeaway:** Gross and operating margins have trended lower for three consecutive quarters, with EPS growth stalling despite top-line expansion.

## Management’s Forward Tone and Positioning: Cautious, Focused on International and Pricing

Management’s Q1 FY2025 commentary was notably more cautious than prior quarters. CEO Calvin McDonald stated, **“We’re operating in a dynamic macroenvironment, particularly in North America, but remain confident in our international momentum.”** The company emphasized “modest price increases” and “strategic inventory management” as levers to defend margins. This is a shift from the more bullish tone of late FY2024, where management highlighted broad-based demand strength. The current communication strategy is more defensive, signaling a focus on protecting profitability rather than chasing aggressive growth.

## KPI Trends & Upcoming Quarter Drivers: Inventory, Comps, and International Mix

Three KPIs will be critical for Q2 FY2025:

- **Inventory:** Ended Q1 at **$1.7B (+23% YoY)**, raising the risk of further markdowns.
- **U.S. Comparable Sales:** Down **2% YoY** in Q1, with management guiding for continued pressure.
- **International Revenue Growth:** Up **19% YoY** in Q1, with China expected to deliver **+25–30%** growth in Q2.

### KPI Movement Table

| KPI                   | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|-----------------------|-----------|-----------|-----------|------------|------------|
| Inventory ($B)        | 1.38      | 1.45      | 1.70      | +23%       | +17%       |
| U.S. Comp Sales (%)   | +3        | +1        | -2        | -500bps    | -300bps    |
| Intl. Revenue Growth (%) | +20    | +18       | +19       | -100bps    | +100bps    |

**Implication:** Elevated inventory and negative U.S. comps will likely pressure margins, but international strength could partially offset these headwinds.

## Missed by the Street: Margin Defense via Targeted Pricing

A subtle but important signal from recent filings is management’s **explicit focus on “strategic, modest price increases”** to counteract tariff and markdown pressures. This approach, mentioned in the Q1 call, is not fully reflected in consensus models, which may be underestimating lululemon’s ability to defend gross margin in the face of cost headwinds.

## Scenarios for the Upcoming Quarter: Bull, Base, and Bear Cases

### Q2 FY2025 Scenario Table

| Scenario | Revenue Range   | EPS Range   | Gross Margin   | Key Assumptions                                              |
|----------|-----------------|-------------|----------------|--------------------------------------------------------------|
| Bull     | ~$2.56B         | ~$2.95      | Stabilizes     | International outperformance, rapid inventory normalization  |
| Base     | $2.54B–$2.56B   | $2.85–$2.90 | Slight decline | Modest price hikes, U.S. comps remain negative, tariffs persist |
| Bear     | <$2.54B         | <$2.85      | Further down   | Deeper U.S. weakness, heavier markdowns, tariff escalation   |

**Most Likely:** The **Base case** is most probable, given current U.S. demand softness and management’s measured guidance. Upside depends on faster inventory turnover and stronger-than-expected international sales.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS   | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|-------|------------------|----------------------|
| Q2 FY2024    | 2.21         | 2.68  | 58.8             | 22.1                 |
| Q3 FY2024    | 2.20         | 2.53  | 58.2             | 21.7                 |
| Q4 FY2024    | 3.21         | 4.29  | 58.0             | 22.0                 |
| Q1 FY2025    | 2.21         | 2.54  | 57.7             | 20.9                 |

### KPI Movement Table

| KPI                   | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|-----------------------|-----------|-----------|-----------|------------|------------|
| Inventory ($B)        | 1.38      | 1.45      | 1.70      | +23%       | +17%       |
| U.S. Comp Sales (%)   | +3        | +1        | -2        | -500bps    | -300bps    |
| Intl. Revenue Growth (%) | +20    | +18       | +19       | -100bps    | +100bps    |

### Key Management Quotes

1. **“We’re operating in a dynamic macroenvironment, particularly in North America, but remain confident in our international momentum.”**  
   — Q1 FY2025 Earnings Call  
   *Signals management’s focus on international as a growth lever amid U.S. softness.*

2. **“We are implementing strategic, modest price increases to help offset tariff and cost pressures.”**  
   — Q1 FY2025 Earnings Call  
   *Indicates a proactive margin defense not fully captured in consensus.*

3. **“Inventory levels remain elevated, and we are taking actions to normalize by year-end.”**  
   — Q1 FY2025 Earnings Call  
   *Highlights risk of further markdowns if inventory remains high.*

4. **“U.S. comparable sales were down 2%, reflecting a more promotional environment.”**  
   — Q1 FY2025 Earnings Call  
   *Confirms ongoing domestic demand challenges.*

5. **“China continues to deliver strong double-digit growth, and we expect this to persist into Q2.”**  
   — Q1 FY2025 Earnings Call  
   *Supports the international outperformance thesis.*

6. **“We expect gross margin to remain under pressure from tariffs and discounting in the near term.”**  
   — Q1 FY2025 Earnings Call  
   *Sets expectations for continued margin headwinds.*

7. **“We are confident in our ability to navigate the current environment through disciplined execution.”**  
   — Q1 FY2025 Earnings Call  
   *Reinforces management’s focus on operational discipline.*

---

**Bottom Line:**  
lululemon’s Q2 FY2025 will be defined by its ability to offset U.S. weakness and margin pressure with international growth and disciplined pricing. The risk/reward is balanced, with execution on inventory and pricing as the key swing factors for the quarter.

LULU: Margin Pressures Offset by International Growth