LULU

• Strategic Action Plan: Management is executing a three-pillar plan focused on product creation, activation, and enterprise enablement to restore full-price sales growth and brand health.
• Product Strategy: The company is aggressively chasing strong performers (e.g., Groove, Defined styles) and increasing chase volume by ~20%. SKU reductions are being implemented to reduce density and improve store experience.
• Category Shifts: Leggings sales declined ~20% in Q2 as guests shift toward 'away-from-body' silhouettes (e.g., Groove Wide Leg, Align Fold-Over Jogger). Women's tops like Scuba and Steady State are performing well. Men’s golf and metal vent tech tees showed strength.
• Brand & Marketing: Increased marketing investment in H2, focusing on mid-funnel creator content and community events like Seaweed Half Marathon and Yoga Summer Series. These activations show strong engagement despite recent top-line pressure.
• Operational Efficiency: Aggressive cost management initiatives include reducing discretionary spending (travel, professional fees), moderating headcount growth, and optimizing real estate. Net new store openings for the year reduced from ~40 to ~35; pop-up stores reduced from 65 to ~40 by end of 2026.
• Leadership Transition: Incoming CEO Heidi O'Neill will join next week to evaluate strategy and define the path forward.

• Full Year 2026 Revenue: Lowered to $10.35–$10.50 billion (down 5–7% vs. 2025).
• Full Year 2026 EPS: Lowered to $9.48–$9.73 (vs. $13.26 in 2025); excludes potential future tariff refunds or share repurchases.
• Q3 2026 Revenue: Expected to decline 10–11%, to $2.29–$2.32 billion.
• Q3 2026 Operating Margin: Expected to be ~6.5% (vs. 17% in Q3 2025) due to fixed cost deleverage and increased marketing.
• Q3 2026 EPS: Expected to be $0.93–$0.98 (vs. $2.59 in Q3 2025).
• Full Year Gross Margin: Expected to decrease ~80 basis points vs. 2025, offset by tariff refund benefits.
• Full Year SG&A: Expected to increase ~450 basis points vs. 2025 due to deleverage and strategic investments.
• Capital Expenditures: Expected to be $680–$700 million for the full year.
• Store Openings: Approximately 35 net new stores globally for 2026.

Total net revenue decreased 4% (5% in constant currency) to $2.4 billion, with comparable sales down 10%.

• North America: Revenue declined 8% (9% in constant currency), with comparable sales down 12%. The U.S. saw an 8% decline, while Canada dropped 11% reported (9% constant currency).
• China Mainland: Revenue increased 4% reported but declined 2% in constant currency, with comparable sales down 8%.
• Rest of World (EMEA/APAC): Revenue increased 5% reported and 6% in constant currency, with comparable sales down 3%.

Channel Performance:

• Stores: Total sales decreased 6%; ended the quarter with 825 stores globally.
• Digital: Revenue decreased 6%, contributing $0.9 billion (39% of total revenue).

• Brand Sentiment: Negative media and social commentary, particularly in China Mainland following specific events, has impacted traffic and sales momentum.
• Product Consistency: Inconsistent performance across product launches and a significant slowdown in core categories like leggings pose challenges to full-price sales recovery.
• Competitive Pressure: Increasing promotional activity in markets like Australia and competitive dynamics in China require careful navigation to maintain premium positioning without eroding margins.
• Tariff Uncertainty: While IEPA tariff refunds provided a Q2 boost, future guidance assumes no additional recovery, and ongoing tariffs impact product margins.
• Cost Deleverage: Slower-than-expected top-line trends are causing significant fixed cost deleverage, pressuring operating margins in the near term.

Q: Analyst asked about the strategic direction for store fleet rationalization and SKU density improvements. / A: Management confirmed a measured approach to store expansion, opening only 35 net new stores globally in 2026, with half of NA openings being pop-up conversions based on proven productivity. To enhance guest experience, Lululemon is reducing SKU density by 15% in stores and testing further curated assortments and localized fixtures in select doors before scaling to the rest of the fleet.

Q: Analyst questioned whether the current downturn is driven by a traffic problem solvable by marketing or a product issue requiring adjustment. / A: Management identified traffic pressure as the primary driver across both Americas and China, exacerbated by negative brand sentiment in China and inconsistent product resonance in NA. They are investing heavily in mid-funnel marketing and community activations to rebuild brand heat, while simultaneously adjusting product assortments by chasing winners and reducing losers to improve conversion rates.

Q: Analyst sought details on the timeline and nature of adjustments needed given the 20% decline in women's leggings. / A: Management explained that the decline reflects a structural shift by consumers toward 'away-from-body' silhouettes rather than just a temporary trend. Adjustments involve reordering aggressively into successful new styles like the Groove Wide Leg and Align Fold-Over Jogger, while managing inventory of legacy leggings through seasonal clearance. The focus is on offsetting these declines with strength in other categories like men's golf and women's tops.

Q: Analyst asked about the shape of Q4 margins and the process/timing for remaining IEPA tariff refunds. / A: Management expects Q4 operating margin pressure to moderate compared to Q3, supported by higher revenue volumes reducing fixed cost deleverage and accelerating tariff mitigation benefits. Regarding refunds, Lululemon received $135 million in Q2 but has not included the remaining $105 million in forward guidance due to uncertainty in the reimbursement process, though they continue to actively participate.