LULU (Trans): Cuts FY guidance; China the key shortfall

Below is Dolphin Research's Trans of $Lululemon(LULU.US) FY26 Q2 earnings call

I. Key takeaways

1) Full-year and Q3 guides were both cut, with H2 assuming continued softness in N. America.

a. FY revenue of $10.35bn–$10.5bn, -5% to -7% YoY. N. America is guided to decline low-teens, with the U.S. similar and Canada slightly better, while Mainland China grows high-single-digit and Other Intl low-single-digit.

b. FY EPS of $9.48–$9.73 vs. $13.26 in 2025. This includes a $0.86 benefit from Q2 IEEPA tariff refunds, excludes any incremental refunds this year and any future buyback impact.

c. Q3 revenue of $2.29bn–$2.32bn, -10% to -11% YoY. N. America is mid-teens down, Mainland China and Other Intl grow 3%–5%; EPS of $0.93–$0.98 vs. $2.59 a year ago.

d. H2 assumes N. America trends weaken vs. Q2, while Intl trends hold broadly steady vs. Q2. Any upside from action plans, if realized earlier, is not in the outlook.

2) Q2 GM and SG&A bridge: tariff refund was the only sizable positive.

a. GPM 60.5%, +200bps YoY. IEEPA refunds added 560bps; product margin -150bps on tariffs and higher markdowns; fixed-cost deleverage -230bps on store network investments, regional mix, and extra fulfillment costs tied to N. America DC network optimization; FX +20bps.

b. Tariffs (ex-refund) were a -160bps headwind, partly offset by ~100bps from efficiency initiatives. Markdown rate rose 70bps YoY; ex-refunds, GPM landed 50bps better than the prior guide of 'down 410bps YoY'.

c. SG&A rate 41.7%, +400bps YoY, driven by fixed-cost deleverage, experiential spend in store labor and marketing, and proxy contest-related costs. These were partly offset by incentive accrual reversals and cost control; this was 100bps better than the prior guide of '500bps deleverage'.

3) Margins: trough in Q3, with much narrower pressure in Q4.

a. Q3 GPM down ~250bps YoY with markdowns +60bps, SG&A deleverage of ~800bps, implying OPM of ~6.5% vs. 17% last year.

b. Q4 OPM pressure narrows to ~250bps, with GPM slightly above last year.

c. For the year, GPM is down ~80bps YoY (including +130bps from refunds), SG&A up ~450bps, and OPM down ~530bps. Effective tax rate is ~30% (29.5% in 2025).

4) Tariffs, shareholder returns, and capex.

a. FY tariff rate assumes 10%–12.5% through Sep and 20% thereafter. The company paid ~$230mn of IEEPA tariffs, of which $134mn was recovered in Q2 (pre-tax $134.5mn, adding 560bps to OPM); the remaining ~$105mn is excluded from guidance given process uncertainty.

b. Q2 buybacks totaled ~2.7mn shares at an avg. price of $120. Remaining authorization is $713mn; full-year buybacks are expected to be similar to 2025. Buybacks remain the preferred cash return.

c. FY capex was cut to $680mn–$700mn. Cash and equivalents were $1.4bn at quarter-end, with nearly $600mn of undrawn revolver capacity.

d. Inventory ended at $1.7bn, -1% YoY in value and down ~7% in units, with the gap driven by higher tariff costs and FX. FY inventory value is expected to grow low-single-digit, with units roughly flat.

II. Call details

2.1 Management remarks

1) Product: core categories stalled, and away-from-body is the only clear incremental driver.

a. Q2 bottoms saw leggings down ~20% YoY, well below plan, with overall bottoms down low-single-digit. Accessories and other declined 13%—backpacks were strong, but bags overall softened, while the company is also proactively streamlining accessories.

b. Consumers are shifting from close-to-body silhouettes to away-from-body. New styles such as Groove Wide-Leg, Align Foldover Jogger, and the refreshed Dance Studio Pant are trending well, and management expects momentum to build through H2 into 2027.

c. In women’s tops, Scuba, Steady State, and Define in SuperLoft fabric performed well. In men’s, Metal Vent Tech tees and golf tops strengthened, driving attach on ABC pants.

d. Playbook: scaling reorders, with total reorders up ~20% YoY this year. The company is refreshing core franchises, adding newness, tightening the SKU count, closely managing inventory, and shortening design-to-shelf lead times.

2) Brand and marketing: community response is positive, but revenue has not turned yet.

a. The summer series in Jun offered free classes across 70 cities in the U.S. and Canada, engaging tens of thousands of consumers.

b. SeaWheeze half marathon and festival returned in Aug for the first time since 2019. Nearly 10k runners from 24 countries participated, ~14k joined the evening event, and the Strava online challenge drew 85k+ participants from 120 countries; the event will continue next year.

c. H2 marketing will step up, with a focus on mid-funnel creators and social content. There will also be US Open activations, the fall marathon season, and a YouTube series with elite athletes; management stressed they have yet to see a revenue inflection.

3) N. America: revenue -8%, with store and digital transformations in tandem.

a. Q2 N. America revenue fell 8% YoY (slightly better than guide), with the U.S. -8% and Canada -11% reported, -9% at constant FX.

b. In stores, the company refreshed fixturing, reduced SKU density by 15%, reorganized flow by sport rather than by style, and strengthened localization. A small test cohort is piloting deeper SKU cuts and localized assortments, with broader rollout after validation.

c. Online, the home and category pages have been refreshed, and product detail pages will be updated in the coming weeks.

4) Mainland China: sentiment shock plus a soft 618 led to only 4% revenue growth.

a. Q2 revenue rose 4% reported but fell 2% at constant FX, with comps down 8%, well below expectations.

b. Negative media and social sentiment from late Q1 into early Q2, amplified by discussions following the post-Q1 call Great Wall event, weighed on brand sentiment and traffic online and offline. E-comm was also impacted by different 618 timing vs. last year, and the company did not join post-618 promotions.

c. At quarter-end, the 'Together Feels Better' event streamed live across five platforms. Brand ambassador Guo Hanyu won Wimbledon, becoming the first Grand Slam tennis champion among its Chinese ambassadors.

5) Other regions: revenue +5%, with wide dispersion across markets.

a. Q2 Other Intl (EMEA + APAC) revenue grew 5% reported and 6% at constant FX, with comps down 3%.

b. Korea is one of the strongest markets globally and marked its 10th anniversary in Aug. Japan was weighed by slower inbound tourism, though a flagship opened in Harajuku, Tokyo, the largest in APAC; Australia saw intensified promotions, and the company did not follow, which slowed purchasing.

c. In EMEA, Middle East franchisees and European tourist flows remain affected by regional conflict. From last week, the brand launched its first marketing collaboration with Zalando across 12 European markets and opened new franchise stores in Athens and Bucharest.

6) Stores and opex: opening plans trimmed, with more aggressive cost control.

a. Net new stores this year were reduced from ~40 to ~35. Pop-ups are being cut from 65 at end-2025 to ~40 by end-2026, and every lease is under case-by-case review.

b. On costs, the company is driving supply chain and non-merch procurement efficiency and deploying AI and automation. Near term, it is cutting travel, professional fees, and store labor hours and slowing headcount growth, while avoiding actions that would harm the brand or long-term growth.

c. New CEO Heidi O'Neill starts next week and will conduct a deep review of the strategy and action plans.

2.2 Q&A

Q: How far along are the store refresh and SKU rationalization? Will you further optimize the store network?

A: Net 35 openings this year, with only ~10 in N. America and half being pop-up conversions; store SKUs are down 15%. Every lease is being reviewed. Of the ~10 new N. America stores, seven are in Mexico; about half of N. America openings are proven pop-ups converting to full-price doors, with the rest strategic presence and densification in strong markets, and this posture will extend through 2027.

The store experience now has lower display density and 15% fewer SKUs, with rollout to more locations underway, alongside stronger visual merchandising. Assortments are reorganized along 'sport' and 'lifestyle' storylines for better storytelling and engagement; a small test is exploring deeper SKU cuts, more localized curation, new fixturing, and richer imagery and sport mannequins, with scale-up after proof of concept.

Q: Is the drag from not joining promotions global, or concentrated in certain markets and categories?

A: Mostly in markets like Australia where promo intensity picked up, and higher discounting in guidance reflects end-of-season clearance rather than following promotions. The goal is to restore a healthy full-price mix. But revenue undershot plan this year, leaving more seasonal goods to clear before year-end, which is embedded in the guide and concentrated in end-of-season activity.

Q: With revenue down, SG&A deleverage is severe. How fast can the cost structure reset?

A: Actions are underway, though cost measures beyond the 2026 guide are not being disclosed. This year’s cost workstreams focus on supply chain, procurement, and tech; near-term cuts include travel, professional fees, and store labor hours, with slower headcount growth.

Given current trends, the company is aligning the cost base more tightly to today’s scale while protecting long-term tracks. The focus remains product and brand, with a need to rebuild sentiment and support the 2027 product engine; management is rigorously reviewing all parts of the operating model.

Q: For Mainland China and Other Intl, how much of the sequential softening is macro vs. product? How is Aug trending, and why call Q3 the bottom?

A: In China, brand sentiment and a soft 618 were the key drivers; management does not cite macro as a primary factor. Globally, the common issue is newness underperforming. China’s macro has been under pressure for some time but is not the main culprit this time; quarter-to-date trends support H2 assumptions for Intl and China.

Actions in China for H2 include flagship openings in Tier-1 core locations with supporting activations, a Tmall Super Brand Day around the outerwear icon, and an early Oct push linked to World Mental Health Day to reinforce the 'wellbeing' positioning to offset Q2’s negative sentiment.

Q: Americas comps fell 12%. After backfilling newness in Aug, are there encouraging signs?

A: Aug started slow and is reflected in guidance; there are some green shoots in product, but potential upside is not embedded. Away-from-body lines are performing better, including Groove, Align Foldover Jogger, and the refreshed Dance Studio; some Define silhouettes are being reordered, and new Scuba/Steady State are also doing well.

Management emphasized the guide reflects current run-rate only. The team is aggressively reordering winners, and that potential upside is not in the outlook.

Q: Will you pause store openings in China or the U.S. next year until the biz. stabilizes?

A: No pause, but a very cautious stance. 2027 space growth will be quantified with the Mar guidance update. China still presents a large square-footage and store-count opportunity viewed through a long-term lens, while plans are being stress-tested against current trends.

In N. America, only ~10 new stores are planned this year, about half being validated pop-up conversions with productivity to support permanence. The rest are strategic presence or densification in strong markets, and this approach carries through 2027, with all projects re-underwritten to current trading.

Q: How will markdown cadence evolve by quarter, and does seasonal clearance end in Q3? What is China’s monthly cadence, and will you still skip promos in Tmall events like Double 11?

A: Markdown rate: +60bps in Q3, flat in Q4, and +40bps for the year; Double 11 participation is as usual. Q2 was already +70bps YoY, and Q4 is flat because last year was a high base; cadence depends on clearing unsold 2026 seasonal goods at quarter end.

In China by month, May was pressured, June improved, and July weakened again. Tmall is positioned as a store channel rather than a promo channel; Super Brand Day around the icon style Wunder Puff is a full-price launch for the outdoor season, while Double 11 will be a normal participation with the goal to match last year’s base.

Q: Is today’s issue more of a traffic problem solvable by marketing, or a longer product reset? Any regional differences?

A: Primarily a traffic issue; conversion is down YoY but has not deteriorated further. The company is pursuing two paths: rebuilding brand heat and sentiment via increased marketing and community events such as SeaWheeze, the summer series, the US Open, and the fall marathons, plus a refreshed social content series.

The second path is conversion, with ongoing read-and-react to winners and misses and aggressive reorders of top performers. Management wants to push on both fronts in parallel.

Q: Are those assessments specific to the Americas, or global?

A: In China, the primary issue is event-driven damage to brand affinity, with product secondary. The focus is to restore brand consideration to pre-incident levels, which is the main lever to recover organic traffic and demand; product improvements will also help China but are second order. Management added that traffic is the biggest drag in both regions.

Q: How do you view the underlying growth of each regional market?

A: Only qualitative commentary was provided that all regions are highly competitive, with no quantified view on TAM or growth. Management stressed the need to win through differentiation and fresh innovation; both N. America and China are defined as competitive markets, and actions are designed around those dynamics.

Q: What did consumer research say? What changes have been made to product innovation, development, and lead times?

A: Consumers want newness and differentiated product, plus community engagement, and plans have been adjusted accordingly. Research shows clear demand for community events alongside innovation—SeaWheeze’s ~10k runners, 85k+ Strava participants, and the summer series validate this.

Process-wise, go-to-market has been improved to shorten lead times, with further work ongoing. Reorder capability has materially increased, with reorders up ~20% YoY this year, and a fast-track design mechanism is compressing design-to-launch cycles.

Q: How do you assess ROI on stepped-up marketing when product-market fit is still being proven?

A: Marketing investment levels will be maintained, but no quantitative ROI threshold or metric was disclosed. With brand heat and product both under pressure, management believes continued spend is necessary, tilted to mid- and upper-funnel brand-building and community efforts such as SeaWheeze, the summer series, fall marathons, the US Open, content series, and social.

Q: How are reactions to new men’s, women’s tops, and bottoms? What adjustments and timing, and is pricing a factor?

A: Away-from-body and Scuba are performing well, while bottoms overall remain down low-single-digit. Golf has resonated and is lifting ABC attach; some other newness failed to connect, and the company is adjusting and reordering winners. Management did not flag pricing as a driver and did not provide a timeline for completion.

Core categories underperformed vs. plan, with leggings a clear example. The shift to away-from-body is a multi-quarter trend, but the pace in Q2 exceeded expectations; reorders are ramping in away-from-body, though the offset is limited, leaving overall bottoms still down low-single-digit. The company aims to improve its away-from-body positioning over time.

Q: Any divergence between stores and digital in performance and traffic trends?

A: Traffic and conversion pressures are broadly similar across both channels, with no major divergence. Priorities are therefore the same: repair brand sentiment via planned activations, drive conversion through product improvements, elevate browseability in stores, and refresh site visuals and UX online.

Q: Q4 revenue trends are similar to Q3, but margin pressure is much less. Can you bridge that?

A: Q4 OPM pressure is ~250bps, a sharp improvement vs. Q3, with GPM slightly above last year. Drivers: first, a higher revenue base in Q4 means less fixed-cost deleverage; second, tariff mitigation efforts build over time, accelerating the positive impact; third, markdowns are roughly flat YoY in Q4 vs. higher in Q2 and Q3. There is still SG&A deleverage, but much less than in Q3.

Q: You paid ~$230mn of IEEPA tariffs and recovered ~$135mn; what’s the process and timing for the remainder? Any risk you cannot recover?

A: $134mn was recovered in Q2; the remaining ~$105mn is not in guidance due to process uncertainty. The company remains engaged in the refund process but did not provide a timeline, nor scenarios under which amounts may not be recoverable.

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