Will lululemon's Cost Controls Buffer Against Margin Compression?

lululemon athletica inc.’s LULU cost-control strategy is centered on a multifaceted approach that balances efficiency with brand integrity. This strategy revolves around supply-chain redesign including vendor negotiations and DC network efficiency, inventory precision to better align production with demand, operational restructuring, logistics optimizations, selective pricing and expense discipline. Streamlining operations and selective role reductions are lowering fixed costs while preserving lululemon’s core capabilities and strategic priorities.

LULU is further optimizing its product mix by prioritizing core franchises and higher-margin products, a strategy that helps reduce markdowns and shield gross margins. Logistics optimizations, such as freight rationalization and enhanced distribution efficiency, are also strengthening cost savings. The company is adopting a selective strategy, implementing targeted price actions in lieu of broad-based increases to preserve value perception and customer loyalty.

Expense discipline across selling, general and administrative expenses remains a vital pillar, with tight spend control across marketing, corporate functions and technology investments. All such endeavors are designed to effectively mitigate the inflationary pressures and increase tariff costs to boost profitability and margin resilience. 

Tariff-related pressures and sourcing complexities remain a notable overhang for lululemon, adding uncertainty to its cost structure and margin outlook. Hence, its gross margin remains pressured, owing to a combination of higher product costs, increased markdowns and unfavorable channel mix.

In a nutshell, lululemon’s cost controls and strategic actions can help buffer some cost headwinds and margin compression, but they are unlikely to completely eliminate the ongoing pressures. The effectiveness of these controls will hinge on the persistence of cost headwinds—particularly tariffs and markdown activity— and lululemon’s ability to successfully execute its mitigation efforts.

LULU’s Peers

NIKE, Inc. NKE and adidas AG ADDYY are the key companies competing with lululemon.

NIKE is facing considerable margin pressure stemming from higher tariffs, unfavorable channel mix and soft demand in key markets. In response, NIKE has rolled out a multi-pronged tariff mitigation strategy. Key actions comprise diversifying its manufacturing footprint away from China to reduce exposure, selectively raising prices across some markets to recapture costs and renegotiating terms with suppliers and strategic partners. The company is also making internal cost controls across sourcing, logistics and operating expenses to boost efficiency. NIKE is further resetting inventory levels, refining product assortments and prioritizing higher-return franchises. NIKE also demonstrated disciplined cost control with lower SG&A expenses and improved inventory management. 

adidas is tightening cost controls by simplifying its operating structure and reducing overheads. ADDYY is sharpening inventory and pricing discipline to boost full price sales and cut promotions, while diversifying and localizing sourcing to reduce supply chain risk and tariff impact. The company has been diversifying its supply chain and implementing risk-mitigation strategies. adidas also leverages AI and streamlined logistics to improve efficiency and better match inventory with demand, strengthening margins amid tariff pressures.

LULU’s Price Performance, Valuation and Estimates

Shares of lululemon have lost 9.6% in the past six months compared with the industry’s decline of 6.4%.

From a valuation standpoint, LULU trades at a forward price-to-earnings ratio of 15.79X compared with the industry’s average of 16.42X.

The Zacks Consensus Estimate for LULU’s fiscal 2025 and fiscal 2026 earnings implies a year-over-year drop of 10.7% and 2.4%, respectively. The company’s EPS estimate for fiscal 2025 and fiscal 2026 has moved up in the past 30 days.

lululemon stock 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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