Lululemon Athletica Inc. (LULU) Earnings

Management highlights

### Leadership Updates - Incoming CEO Heidi O'Neill will join the company in September 2026; three new directors have joined or will join the board of directors in 2026. Interim leadership remains focused on discipline, execution, and restoring growth momentum. ### Core Strategic Priorities - Strengthen performance in North America while expanding the global growth engine. The company is acting with urgency to address Q2 headwinds including negative social/media commentary and underperforming recent product launches. ### Product Strategy Updates - Raising product design standards for core franchises, increasing innovation flow and speed to market, while maintaining a relentless focus on quality. Q1 saw strong guest reception for updates to core run franchises (Fast & Free, Swiftly, Metal Vent) as well as Daydrift and Define styles. - The recent *new look of yoga* campaign, focused on away-from-body Align and Groove styles, received positive product response but failed to deliver the expected halo effect on the full assortment. - Chase volume (rapid replenishment of top-selling styles) is up 20% year-over-year; total inventory units are down ~4%, allowing faster restocks of high-demand styles. Mainline product development timeline has been cut from 18-24 months to 15-16 months, with a target of 12-14 months. - Upcoming launches will focus on warm weather styles for run, tennis, golf, lifestyle, plus new innovations in outerwear and lounge for the second half of 2026. ### Brand & Marketing Activation - The company is increasing marketing investment to rebuild brand momentum, with larger, bolder global activations planned for the second half of 2026, including the recently completed Great Wall of China yoga event, the return of the sold-out SeaWheeze half marathon, limited-edition event products, grassroots community events, new collaborations, and an updated media strategy. ### Regional & Channel Updates - **North America**: Q1 saw sequential full-price sales improvement vs Q4 2025. In-store enhancements include 15% SKU reduction to highlight newness, clearer merchandising segmentation by performance/lifestyle, reduced markdowns to preserve premium positioning, and testing of further localization and in-store experience upgrades in a subset of locations. E-commerce is also being updated with sharper visual merchandising and storytelling. - **China Mainland**: Strong start to 2026 driven by Chinese New Year activations, with a temporary momentum slowdown from negative commentary that has now subsided. Upcoming activations include the sixth annual Summer Sweat Games national championship; the company reaffirms full-year 20% growth expectations. - **Rest of World**: APAC and EMEA performance remains solid, with temporary headwinds from Middle East franchise disruption and softer tourism in Europe/Japan. The first store in Greece opened, and the first location in India is planned for late 2026. ### Enterprise Efficiency Initiatives - Ongoing work includes global supply chain network optimization, indirect cost reduction via improved procurement, and implementation of AI-powered automation and technology to drive enterprise-wide efficiency.

Guidance

- ### Q2 2026 Guidance (downward revised from prior expectations) - Total revenue expected between $2.45 billion and $2.475 billion, a 2% to 3% year-over-year decline. North America revenue expected to decline low double digits; China Mainland expected to grow mid- to high teens; Rest of World expected to grow high single to low double digits. 13 net new company-operated stores and 13 store optimizations are planned. - Gross margin expected to decline ~410 basis points year-over-year, driven by higher tariffs, store investment, and increased markdowns (up 50 basis points year-over-year) to clear seasonal inventory. Operating margin expected to hit 11.6% (down from 20.7% in Q2 2025); diluted EPS expected between $1.76 and $1.81 (down from $3.10 in Q2 2025). - ### Full Year 2026 Guidance (downward revised from prior expectations) - Total revenue expected between $11 billion and $11.15 billion, flat to down 1% year-over-year. North America revenue expected to decline high single digits; China Mainland growth reaffirmed at ~20%; Rest of World growth reaffirmed at mid-teens. - Net new company-operated store openings expected to land near the low end of the prior 40-45 range, with 10-15 openings in North America (8 in Mexico) and 25-30 in international markets (majority in China); total square footage growth expected in low double digits, ~35 store optimizations planned. - Gross margin expected to decline ~90 basis points year-over-year (down from prior expectation of a 130 basis point decline); full-year markdowns expected to be flat to slightly improved vs 2025, with Q2 as the full-year high water mark for markdowns and sequential improvement through the second half. Tariffs are expected to have a 30 basis point gross negative impact, almost fully offset by efficiency initiatives; guidance assumes a 10% incremental tariff rate for Q2 (down from prior 20% assumption) and 20% incremental for the second half, with no assumed recovery of previously paid IEEPA tariffs. - SG&A expected to deleverage ~290 basis points year-over-year, driven by reinstatement of expenses cut in 2025, proxy contest one-time costs, and increased marketing spend (now 10-15% higher than 2025, equal to 6-6.5% of revenue vs 5.6% in 2025). Operating margin expected to decline ~380 basis points year-over-year; diluted EPS expected between $10.95 and $11.15 (down from $13.26 in 2025). - Capital expenditures expected between $700 million and $720 million; dollar inventory growth expected in low to mid-single digits with units slightly down; ~$1 billion remains on the share repurchase program, with 2026 repurchase levels expected to match 2025 levels. - Guidance does not include material expected upside from ongoing corrective initiatives, so actual results could land above the guided range if actions deliver expected improvements.

Segment performance

Total Q1 2026 net revenue was $2.5 billion, a 4% increase (2% in constant currency), with total comparable sales down 2%. Digital channel revenue was $1 billion, accounting for 40% of total revenue, growing 4% year-over-year; store channel sales grew 3% year-over-year, with the company ending the quarter at 816 global stores, 11% higher square footage than Q1 2025. By product category: men's revenue grew 7% year-over-year, women's revenue grew 4%, and accessories/other declined 1%. By regional segment: 1. North America: Revenue decreased 3% year-over-year (4% in constant currency), with comparable sales down 6%. Canada revenue fell 3% (6% constant currency), U.S. revenue fell 4%. 2. China Mainland: Revenue increased 30% year-over-year (23% in constant currency), with comparable sales up 13% (8 percentage points of growth came from the shift of Chinese New Year into Q1 2026). 3. Rest of World: Revenue increased 13% year-over-year (9% in constant currency), with comparable sales up 1%.

Risks & headwinds

- Negative brand commentary on social media and in mainstream press in late Q1 and early Q2 drove broad-based traffic declines across key markets including the U.S. and China, despite the commentary having since subsided, trends have not yet returned to pre-disruption levels. - Some recent product launches have underperformed expectations, particularly the halo effect from the new look of yoga campaign, creating the need for incremental seasonal clearance markdowns in Q2. - Higher than expected tariff costs continue to pressure gross margins, with no assumed recovery of previously paid tariffs under IEEPA included in current guidance. - Temporary macroeconomic uncertainty and sector-specific demand softness created a more challenging operating environment in the first half of 2026. - Temporary headwinds include regional disruption to the Middle East franchise business and softer tourism in Europe and Japan.

Analyst Q&A

• Q: What is the main driver of recent top-line weakness, how much of the current assortment is new product, and will clearance decelerate in the back half? /

  A: Recent weakness is driven primarily by traffic declines from two factors: spikes in negative brand commentary in late Q1/early Q2, and some recent product launches underperforming expectations, rather than a shift toward fashion over core athletic positioning. The company increased newness penetration from 23% in 2025 to ~30% currently, targeting 35% for 2026, with underperformance spread across both new and core products. Markdowns will be up 50 basis points in Q2, but will improve sequentially through the second half, resulting in flat to modestly improved full-year markdowns vs 2025.

• Q: Is product underperformance a risk for international markets, and are international consumers less responsive to newness vs core products? /

  A: International markets have a more diversified sales mix, and refreshing core franchises with new colors and iterations remains a stronger growth driver in international markets than it is in North America. The diversified portfolio of new and core products is currently performing well in international segments, so product-related headwinds are not expected to be a major issue overseas.

• Q: What caused the negative social media commentary, where did it impact the business, and does it have lingering effects? /

  A: Negative commentary stemmed from two main factors: the company's proxy contest in April 2026, and consumer questions about the composition of some products mid-April. The commentary impacted both the U.S. and China across all consumer demographics, leading to broad-based traffic declines. While the stories have since died down, trends have not yet returned to pre-disruption levels, so management updated guidance to reflect current observed trends.

• Q: What learnings have come from underperforming new launches, and what changes will be made to product design and launch strategy going forward? /

  A: Key learnings relate to both product design and how the company activates and markets new launches. While the away-from-body yoga products launched as part of the new look of yoga campaign received good guest reception, they did not deliver the expected halo effect across the full assortment, which management partially attributes to color choices and slow build of consumer awareness. Going forward, the company will increase front-and-center activation of new products both in-store and online, and prioritize replenishment of proven top-selling styles (20% more chase volume year-over-year) while taking learnings into account for upcoming launches.