Lululemon Athletica Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Product Assortment:
  • U.S. business faces challenges with stale lounge and social products; plan to increase new styles from 23% to ~35% next spring, focusing on performance, lounge/social, and iconic items. New design team led by Jonathan Cheung infusing new energy. Enhanced go-to-market process with faster lead times and ability to chase strong-performing styles. Ranju Das joined as Chief AI and Technology Officer to expedite product innovation.
• International Business: China Mainland revenue up 25% in constant currency; strong growth in Rest of World; opened new stores in various markets with plans for more.
• Macro Environment: Impact of tariffs and de minimis provision leads to revised guidance; actions taken to mitigate costs, including strategic pricing, supply chain initiatives, and expense savings.

Segment Performance

• Total Net Revenue: Rose 7% or 6% in constant currency to $2.5 billion, with comparable sales increasing 1%.
• Regions:
  • Americas: Revenue up 1% on reported and constant currency basis, comparable sales down 3%; Canada up 1% on both bases, U.S. flat.
  • China Mainland: Revenue up 25% or 24% in constant currency, comparable sales up 16%.
  • Rest of World: Revenue grew 19% or 15% in constant currency, comparable sales up 9%.
• Channels:
  • Store: Total sales up 3%, 784 stores globally; 63 net new stores since Q2 2024.
  • Digital: Revenues up 9%, contributing $1 billion (39% of total revenue).
• Categories: Men's up 6%, women's up 5%, accessories/other up 15%.
• Gross Profit: $1.48 billion (58.5% of net revenue), down from 59.6% in Q2 2024, driven by higher markdowns, tariff impact, etc., but offset by favorable mix, lower ocean freight, etc.

Guidance

• Full Year 2025:
  • Revenue expected $10.85B-$11B (2%-4% growth, 4%-6% excluding 53rd week in 2024).
  • Americas: flat to down 1% (U.S. down 1%-2%, Canada approx flat); China Mainland: 20%-25% growth; Rest of World: ~20% growth.
  • Gross margin expected to decrease ~300 basis points vs 2024, driven by tariffs and de minimis.
  • Markdowns expected ~50 basis points higher than last year.
• Q3 2025:
  • Revenue expected $2.47B-$2.5B (3%-4% growth).
  • Gross margin expected to decrease ~410 basis points.
  • SG&A rate expected to deleverage ~150 basis points.
  • EPS expected $2.18-$2.23.

Risks

• Tariffs and De Minimis: Increased tariffs and removal of de minimis exemption impacting gross margin and guidance.
• Market Dynamics: Challenging consumer environment and competitive landscape affecting product performance and sales.
• Inventory Management: Higher inventory growth due to tariff rates and foreign exchange, requiring careful management.

Question and Answer

• Q: Would love to hear more about the product assortment changes you're making. First, I would love to hear about how you can impact the back half. It sounds like there's a lot of expectations around the first half of next year. But what should we expect to see in the back half of the year? And then maybe help us understand how much of the assortment, this casual piece where you're seeing the slower sales trend, how much of the assortment is that? And what gives you confidence that this is the piece that needs to be fixed? A: In terms of the product pipeline, the team is focused on maintaining momentum in performance activities, designing into several new styles across lounge and social, and giving a fresh perspective to some iconic items. The back half has more new styles than the first half. Casual is ~40% of the assortment. Confidence comes from guest response to new styles and the plan to increase newness to offset pressure.
• Q: Maybe a follow-up. Just on that lifestyle point of being 40% or so of the assortment. Is that the right mix, do you think over time? And are there any differences by geography? And then just separately, just on the performance versus casual kind of deviation. It just feels like the performance franchises are longer dated versus like your later entry into casual. So I'm just a little bit surprised by the fatigue there. So any color or thoughts on what's different would be helpful. A: Think a 60-40 split is a good benchmark. No major differences by geography. Performance franchises have been successful due to solving unmet needs, while some lounge/social core franchises have seen fatigue as they relied on same playbook for too long.
• Q: Calvin, you talked a lot about supply chain initiatives in your prepared remarks, specifically around speed and getting faster. Can you talk specifically about how much faster lead times need to get where they are today, where you really want to take them ultimately? And how you're going to manage that process of getting a company that's worked one way for a really long time around creating product, both in line and innovation into doing something really sounds pretty different. A: Teams have improved go-to-market calendar, aligning with vendors and merchants, and improving ability to adjust within process. Goal is to be quicker, with examples like upfront fabric work and adjusting POs. Ranju Das joining to leverage technology for faster innovation.
• Q: So Calvin, on your revised outlook in both the U.S. and China for the year, could you elaborate on what you saw or how you saw traffic trends progress over the course of the second quarter? And any change so far in the third quarter that informed the more cautious outlook for the year? A: May was strongest month, July weakest. Traffic slowed in stores and e-com. Conversion consistent, AOV flat to slightly worse. Q4 China expected lower due to Chinese New Year shift.
• Q: I was curious, we saw e-commerce outpace retail stores for the first time, I think, since '23 in terms of growth. Are you seeing a change in the way the customer is shopping the brand? Or is that reflective of where you were choosing to do kind of the clearance activity? A: Traffic declined slightly in both stores and e-com. Conversion uptick on e-com. Higher markdowns cleared more through e-commerce channels, reflecting that.