Dive Brief:
- Lululemon is raising prices and prepping for a hit to gross margin as tariffs sweep the industry, executives said on a Thursday earnings call. CFO Meghan Frank said the price increases would be modest, strategic and apply to just a small portion of its assortment. They’ll go into effect in the second half of Q2 and into Q3.
- The retailer largely maintained its guidance for the year, calling for roughly 5% to 7% revenue growth, but lowered earnings per share estimates. Lululemon also said margins would decrease more than planned given the current 30% tariffs on China and 10% on remaining countries. Gross margin is expected to decline by 110 basis points this year, compared to previous guidance for a 60 basis-point decrease.
- Revenue in the quarter was up 7% to $2.4 billion, with growth in the Americas landing at 3% and international up 19%. Comps in the quarter grew just 1% thanks entirely to international, as comps fell 2% in the Americas.
Dive Insight:
While Needham analyst Tom Nikic called Lululemon’s results “fairly lackluster,” he and others noted that the market’s reaction was outsized compared to the retailer’s actual performance, especially given that guidance cuts were the result of tariffs.
“That said, the domestic business remains sluggish and international comp growth slowed dramatically in Q1, likely raising questions about the growth [algorithm] from here,” Nikic said in emailed comments.
Lululemon store traffic declined in the quarter, especially in the U.S. market, Frank said.
CEO Calvin McDonald noted that those shoppers in particular are being cautious about spending right now, making a recovery in the region more difficult. “We're not seeing the same discerning consumer in Canada as we are seeing in the U.S. in terms of traffic as well as some other metrics that we monitor,” he said.
He stressed that Lululemon still gained share across both men and women in the U.S. and said shoppers are responding well to newness in the assortment, including the No Line Align legging and the Daydrift trouser. The leggings will be in all the retailer’s stores by September and the Daydrift will be restocked around the same time, potentially leading to more upside ahead.
Wells Fargo analysts noted that newness has now returned to historic levels after the retailer last year fell short on choices for U.S. shoppers, but analysts were overall disappointed in the somewhat lengthy timeline for product rollouts and the lack of progress in the U.S.
While analysts expected stabilization in the U.S., Wells Fargo said “we received the opposite,” and Jefferies analysts noted bleakly that the Americas “keeps getting worse.”
“Despite this decline, [management] continues to prioritize product newness and China expansion over addressing a pullback from core customers and evident traffic declines. We believe this misalignment is concerning,” Jefferies analysts led by Randal Konik said in emailed comments. “Fixing the Americas should be the top priority given its size (75% mix), yet the focus on newness isn't resonating broadly and the unaddressed rise in competition has led to increased promotions.”
