lululemon Q2 Metrics: Margin Squeezes as Tariffs & Markdowns Bite

Tariffs have emerged as the biggest profitability drag for lululemon athletica inc. LULU, reshaping its margin profile in fiscal 2025. The removal of the U.S. de minimis exemption, which had previously allowed duty-free shipments under $800, has added significant costs to its e-commerce model. Combined with higher reciprocal tariff rates, management now expects a 220-basis-point (bps) hit to gross margin in fiscal 2025, nearly $240 million in incremental expenses, even after mitigation efforts like vendor negotiations, supply chain shifts and modest pricing. These structural headwinds are expected to intensify in fiscal 2026, with management projecting a net $320 million margin impact despite ongoing cost actions.

In second-quarter fiscal 2025, these pressures were already visible. Gross margin contracted 110 basis points year over year to 58.5%, as higher markdowns and tariffs weighed on profitability. Markdowns alone contributed 60 bps of pressure, well above management’s forecast, as the company worked to clear seasonal inventory amid weak U.S. demand. While EPS of $3.10 beat the Zacks Consensus Estimate, revenues of $2.53 billion missed the same, with flat U.S. sales and a 3% comps decline offsetting strong international growth. Operating margin fell 210 bps to 20.7%, with SG&A expenses rising 9% as lululemon continued to invest in marketing, store openings, and digital initiatives.

lululemon cut its full-year 2025 outlook, now guiding for a 300-bps gross margin decline versus prior expectations of just 110 bps. Third-quarter fiscal 2025 is set to see even steeper pressure, with a projected 410-bps drop due to tariffs, de minimis removal and fixed cost deleverage. With U.S. softness persisting and margin headwinds mounting, management does not expect meaningful relief until its product refreshes gain traction in fiscal 2026.

Margins at Risk Amid Tariff Pressures: How Peers RL & NKE Are Faring

With tariffs and the loss of duty exemptions squeezing profitability across apparel, peers like Ralph Lauren Corporation (RL) and NIKE Inc. NKE are navigating margin pressures in contrasting ways.

Ralph Lauren delivered strong margin performance in first-quarter fiscal 2026 despite tariff headwinds, aided by higher average unit retail, reduced discounting and a favorable channel mix. Gross margin expanded as strong full-price sales and lower cotton costs outweighed inflation and tariff pressures. Management noted tariffs remain the biggest headwind, particularly in the second half, but emphasized supply chain flexibility, selective pricing and cost efficiencies as key levers to offset pressure while sustaining operating discipline and long-term profitability.

NIKE’s margins remain under pressure as tariff-related costs add to ongoing challenges from discounts, supply chain deleverage and channel mix shifts. In fourth-quarter fiscal 2025, gross margin fell sharply, reflecting heavier promotional activity and a weaker mix, while new tariffs are expected to cut into profitability by roughly 75 bps in fiscal 2026, with the greatest hit in the first half. Management is mitigating through sourcing shifts, selective price increases and tighter expense discipline.

The Zacks Rundown for LULU

lululemon’s shares have plummeted 54.7% year to date compared with the industry’s decline of 28.6%.

From a valuation standpoint, LULU trades at a forward price-to-earnings ratio of 13.19X, higher than the industry’s 11.39X.

The Zacks Consensus Estimate for lululemon’s fiscal 2025 earnings implies a year-over-year decline of 11.1%, whereas the consensus mark for fiscal 2026 EPS suggests growth of 1.6%. Earnings estimates for fiscal 2025 and 2026 have been southbound in the past seven days.

LULU currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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