- Lululemon Q2FY26 revenue missed at $2.42 billion vs $2.46 billion estimate
- Full-year EPS guidance cut to $9.48-$9.73 from $10.95-$11.15
- Gross margin rose 200 bps to 60.5% aided by 560 bps tariff refund
- US sales down 8%; China constant currency sales down 2%
- Shares fell 20.3% pre-market; analysts cite brand saturation
*this image is generated using AI for illustrative purposes only.
Lululemon Athletica Inc (NASDAQ: LULU) reported second-quarter fiscal 2026 revenue of $2.42 billion, missing consensus estimates of $2.46 billion. The athletic apparel maker posted earnings per share of $2.92, driven by a significant one-time tariff refund.
Total revenue declined 4% year-over-year, driven by an 8% drop in Americas net revenue that offset a 4% increase in international sales. Total comparable sales fell 9% year-over-year on a constant currency basis. Comparable sales dropped 10% overall.
Financial Performance
The company’s inventory decreased 1% year-over-year to $1.7 billion. Lululemon ended the quarter with 825 total stores after opening nine new company-operated locations. Global square footage increased 11%, with 41 net new stores added since the second quarter of 2025. Digital channel revenues decreased 6%, contributing $0.9 billion or 39% of total revenue.
Gross profit for the second quarter was $1.46 billion, or 60.5% of net revenue, compared to 58.5% in Q2 2025. This increase of 200 basis points was driven primarily by a 560 basis point benefit from IIPA tariff refunds. Excluding the refund, gross margin was 50 basis points better than guidance. Product margin fell 150 basis points. Tariffs, excluding refunds, weighed on gross margin by 160 basis points. Efficiency initiatives added 100 basis points. Meanwhile, markdowns reduced margin by 70 basis points. Fixed-cost deleverage weighed on gross margin by 230 basis points, while foreign exchange provided a 20-basis-point benefit. SG&A expenses were approximately $1.01 billion, or 41.7% of net revenue, up 400 basis points from the prior year due to fixed cost deleverage and proxy contest fees.
Revised Outlook
Lululemon issued significantly weaker guidance for the third quarter and full year. Third-quarter revenue is expected to be between $2.29 billion and $2.32 billion, well below the estimate of $2.53 billion. Earnings per share for the quarter are projected at 93 cents to 98 cents, compared to estimates of $2.43.
For the full fiscal year, the company lowered its revenue outlook from $11 billion to $11.15 billion to a new range of $10.35 billion to $10.50 billion. This contrasts with analyst estimates of $11.04 billion. Full-year EPS guidance was cut from $10.95 to $11.15 per share to a range of $9.48 to $9.73 per share, against estimates of $10.96.
Regional Headwinds and Brand Sentiment
Management highlighted challenges in brand sentiment and traffic, particularly in North America and China Mainland. In North America, revenue declined 8%, with the US down 8% and Canada down 11%. In China Mainland, revenue increased 4% on a reported basis but declined 2% on a constant currency basis, impacted by negative media commentary and a softer-than-expected Tmall 618 event. Rest of World revenue increased 5% on a reported basis.
Interim Co-CEO André Maestrini told analysts that negative commentary in Chinese media and on social platforms, which intensified after a company event held at the Great Wall of China, hurt store traffic and sales momentum in the region. He also cited Tmall’s decision not to repeat its 618 Shopping Festival promotion as it had the previous year. Management said traffic remains the biggest driver of weakness across both China and North America.
Product performance was mixed, with leggings sales declining approximately 20% in Q2 as guests shifted toward away-from-body silhouettes like the Groove Wide Leg and Aligned Fold Over Jogger. Accessories declined 13%. Management stated it is chasing approximately 20% more volume this year relative to last year to react to guest demand. The Define franchise remained strong. Scuba and Steady State products featuring SuperLoft fabric also gained traction. Men’s revenue fell 1%, with Metal Vent Tech tees and golf tops providing support. Accessories revenue dropped 13% despite strength in backpacks.
Strategic Initiatives and Cost Management
Strategic initiatives include focusing on product innovation, increasing marketing investments, and optimizing store operations. The company is reducing its expense base through supply chain efficiencies and AI-powered automation. Discretionary spending is being moderated across travel, professional fees, and store labor hours.
Lululemon plans approximately 35 net new store openings this year, down from previous guidance of approximately 40. Pop-up stores will be reduced from 65 at the end of last year to approximately 40 by the end of 2026. Incoming CEO Heidi O'Neill joins next week to evaluate strategy and current action plans.
Future Fund’s Gary Black said the stock’s slide was predictable, citing “poor merchandising, product strategy, and leadership,” including a four-month gap between the company’s announcement of new CEO Heidi O’Neil in April and her actual start date of Sept. 8.
Investor Reaction and Market Sentiment
Lululemon shares fell 20.3% to $97.00 in pre-market trading. This follows a sharp decline in after-hours trading where shares initially fell 16.40% to $101.82 before plunging further to close extended trading at $99.65, representing an 18.17% decline. Year-to-date, the stock has slumped 42.24% and fallen 38.66% over the past year.
Michael Burry, known for his role in 'The Big Short,' described Lululemon as the “trickster in my portfolio” in a Substack post. He noted that the position is his largest and appeared determined to take him where “mermaids fear to tread.” Market commentator Sam Badawi reported that Burry plans to buy aggressively below $100 and sees a potential private equity takeover as a long-term outcome.
Analyst Nicholas Mugalli noted that Wall Street has broadly abandoned its “Buy Ratings” on the stock, citing negative laterals from the sportswear industry. Shay Boloor, Chief Market Strategist at Futurum Equities, commented on the sharp decline, highlighting the pressure on investors.
Analyst Reactions
Several major analysts adjusted their forecasts following the earnings announcement:
- Bernstein analyst Aneesha Sherman maintained the stock with a Market Perform rating and lowered the price target from $145 to $115.
- JP Morgan analyst Matthew Boss maintained the stock with a Neutral rating and lowered the price target from $154 to $95.
- Guggenheim analyst Simeon Siegel reiterated the stock with a Neutral rating.
- KeyBanc analyst Ashley Owens reiterated the stock with a Sector Weight rating.
Guggenheim Securities analyst Simeon Siegel noted that while the third-quarter guidance implies a 60% year-on-year decline in earnings, the implied fourth-quarter earnings "may not be conservative enough." Siegel stated that Lululemon's sales and gross margin contraction of 355 bps, excluding tariff refunds, were the worst-performing in the industry. He argued that the U.S. brand is "meaningfully overstretched," sitting well above the $3 billion-$4 billion industry-wide domestic brand saturation level. Siegel warned that the latest outlook is just one of a "thousand cuts" and that domestic revenue has only begun to reset.
What the Numbers Show
The divergence between the Americas and international segments highlights regional headwinds. While international revenue grew 4%, the Americas segment contracted by 8%. Given that the Americas is typically the larger contributor, this regional weakness drove the overall 4% decline in total revenue and the 9% drop in comparable sales. Additionally, the Q2 EPS result of $2.92 included an $0.86 per share benefit from tariff refunds, indicating that underlying operational profitability faced pressure despite the top-line miss. Guggenheim’s analysis reinforces this view, noting that excluding the 560 bps tariff refund benefit, the underlying gross margin performance was significantly weaker than reported.
Balance Sheet Position
Lululemon exited the quarter with approximately $1.4 billion in cash and cash equivalents. The company also had nearly $600 million of available revolving-credit capacity. Lululemon repurchased about 2.7 million shares at an average price of $120. About $713 million remained under its authorization.
Interim co-CEO and CFO Meghan Frank stated that teams remain focused on accelerating growth by strengthening product offerings and increasing marketing investments while maintaining disciplined expense management.
Frank noted that the company is taking a prudent approach with its revised full-year outlook as it navigates challenging dynamics.
How will incoming CEO Heidi O'Neill's strategy specifically address the 20% decline in leggings sales and the shift toward away-from-body silhouettes?
What concrete steps is Lululemon taking to repair brand sentiment in China following the negative media fallout from the Great Wall event?
Could Michael Burry's aggressive buying below $100 signal an imminent private equity takeover or a broader consolidation in the athletic apparel sector?