Can lululemon Halt Margin Erosion Amid Tariff-Driven Cost Hits?

lululemon athletica inc. LULU is entering 2026 under pressure to maintain margins, as higher tariffs and the removal of the de minimis exemption weigh on costs. In third-quarter fiscal 2025, the gross margin declined 290 basis points (bps) year over year to 55.6%, led largely by tariff impacts and elevated markdowns as U.S. demand softened. Management expects the pressure to intensify in fourth-quarter fiscal 2025, guiding for a 580-bps gross margin decline, with tariffs alone accounting for more than 400 bps.

However, lululemon is not standing still. The company has outlined a multi-pronged mitigation strategy centered on enterprise efficiency, selective pricing actions and supply-chain optimization. Management emphasized vendor negotiations, distribution center efficiency and enterprise-wide savings as key levers to offset tariff-driven cost inflation over time. Pricing increases implemented so far have shown elasticity in line with expectations, suggesting room to protect margins without materially hurting demand.

Product strategy also plays a role. lululemon is accelerating new style penetration to 35% in spring 2026, while shortening product development cycles and expanding chase capabilities. By keeping inventory units below sales growth and reacting faster to winning styles, management aims to lift full-price sell-through and reduce markdown dependency.

While management acknowledges that margin headwinds will persist into fiscal 2026, the balance sheet provides flexibility. With $1 billion in cash and no debt, lululemon can absorb near-term pressure while investing in efficiency and product innovation. The key question for investors is whether these initiatives can outpace tariff costs quickly enough to stabilize margins as U.S. demand recovers.

Do Tariffs Pose Similar Margin Threats for LULU’s Rivals: CROX & RL?

With tariffs driving up sourcing costs across apparel, the question is whether Crocs Inc. CROX and Ralph Lauren Corporation RL can defend margins as effectively as lululemon.

Crocs faces clear margin pressure as tariffs shaved about 230 bps from the gross margin in third-quarter 2025. However, management is pushing back through higher ASPs, lower negotiated product costs and aggressive cost savings, including $150 million identified between 2025 and 2026. With promotions dialed down and inventory tightly managed, CROX believes margin erosion can be contained despite ongoing tariff-driven cost headwinds.

Ralph Lauren is navigating tariff-driven cost pressures with disciplined pricing and tight cost control. Management highlighted selective price increases, supply-chain diversification, and lower freight and input costs as key margin offsets. A favorable mix shift toward higher-margin categories and regions, alongside reduced promotional intensity, is helping protect profitability. These levers position RL to limit margin erosion even as tariffs continue to weigh on costs.

The Zacks Rundown for LULU

lululemon’s shares have gained 23.6% in the past three months compared with the industry’s rise of 1%.

From a valuation standpoint, LULU trades at a forward 12-month price-to-earnings ratio of 16.51X, lower than the industry’s 16.6X.

The Zacks Consensus Estimate for lululemon’s fiscal 2025 and 2026 earnings implies year-over-year declines of 11% and 1.4%, respectively. Earnings estimates for fiscal 2025 have been northbound in the past 30 days, whereas estimates for fiscal 2026 have been southbound in the same period.

LULU currently carries a Zacks Rank #3 (Hold).

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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