LULU Q1 Earnings Call: Management Addresses Margin Headwinds, International Growth, and U.S. Consumer Shifts

Athletic apparel retailer Lululemon (NASDAQ:LULU) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 7.3% year on year to $2.37 billion. On the other hand, next quarter’s revenue guidance of $2.55 billion was less impressive, coming in 0.7% below analysts’ estimates. Its GAAP profit of $2.60 per share was 0.5% above analysts’ consensus estimates.

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StockStory’s Take

Lululemon’s first quarter results reflected a combination of shifting consumer behavior in the United States and continued momentum in international markets. Management emphasized that U.S. consumers remain cautious, with CEO Calvin McDonald stating, “Consumers remain intentional about their buying decisions,” despite Lululemon gaining market share in the premium athletic wear segment. Internationally, the company reported strong growth in China and the broader APAC and EMEA regions, aided by new store openings and brand activations, such as the Summer of Align campaign. Product innovation, including launches like Daydrift and Align No Line, contributed to guest engagement and supported sales across both athletic and lifestyle categories.

Looking ahead, Lululemon’s outlook is shaped by several external and internal factors, including tariffs, ongoing investments in new markets, and evolving consumer trends. CFO Meghan Frank highlighted that gross margin pressure will intensify in the near term due to increased tariffs and foundational investments, but mitigation strategies—such as selective price increases and supply chain efficiencies—are expected to gain traction later in the year. McDonald underscored that while the U.S. market faces headwinds, the company will continue to invest in innovation and global expansion, aiming to leverage its strong balance sheet. Management believes its diversified product pipeline and international growth will help offset margin pressures.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to cautious U.S. consumer behavior, strong international expansion, and ongoing product innovation. Margin pressure was mainly linked to tariffs and strategic cost increases.

• U.S. consumer caution: Leadership noted that U.S. store traffic declined relative to last year, and purchasing behavior remains deliberate. However, Lululemon reported modest revenue growth in the U.S. and asserted it gained market share in premium athletic wear segments.
• International market strength: China Mainland and other international regions delivered double-digit sales growth, with McDonald highlighting expansion into new markets like Denmark and Turkey, and upcoming entries into Italy, Belgium, and the Czech Republic.
• Product innovation and newness: The company pointed to strong guest response for new product launches like Daydrift trousers, Be Calm, Glow Up leggings, and the Align No Line update. Early sell-through rates were high, leading to plans for broader distribution in the fall.
• Brand campaigns and engagement: Lululemon increased brand awareness through campaigns such as the Summer of Align, featuring global events and influencer partnerships. Management reported a rise in unaided brand awareness in the U.S. from the mid-30s to 40%.
• Tariff and margin headwinds: CFO Meghan Frank explained that higher tariffs and modestly elevated markdowns were the main drivers behind the decline in operating margin, with mitigation efforts focusing on selective pricing actions and supply chain efficiencies expected to have a larger effect in the second half of the year.

Drivers of Future Performance

Lululemon expects external cost pressures and consumer trends to shape revenue growth and margins over the next several quarters.

• Tariff impact and mitigation: Management identified tariffs as a primary driver of margin compression in the near term. Frank stated that mitigation actions—such as targeted price increases and sourcing adjustments—will become more significant later in the year, with the expectation that these measures will help offset higher costs.
• Continued global expansion: The company plans to open 40 to 45 new stores in 2025, with the majority outside the U.S., focusing especially on China. Management believes international markets remain underpenetrated, providing a long runway for growth.
• Product pipeline and consumer response: Leadership emphasized the importance of new product launches and innovation to drive sales. They plan to expand both technical and lifestyle categories, responding to consumer preferences for newness, while closely monitoring U.S. traffic and macroeconomic headwinds.

Catalysts in Upcoming Quarters

In future quarters, the StockStory team will be monitoring (1) whether mitigation strategies for tariffs and cost inflation are reflected in improved gross margin, (2) signs of U.S. traffic stabilization or recovery, and (3) continued robust international growth, particularly in China and new markets. Progress in executing new product launches and maintaining brand engagement will also be closely tracked.

Lululemon currently trades at a forward P/E ratio of 16.6×. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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