Earnings Preview | Macroeconomic challenges may pressure Lululemon's Q1 profit margins, but long-term growth prospects remain robust

According to Zhitong Finance APP, Lululemon Athletica (LULU.US) will announce its first-quarter results for the fiscal year 2025 after the U.S. stock market closes on June 5 (Thursday) Eastern Time. The market generally expects Lululemon's Q1 sales to increase by 6.6% year-on-year to $2.35 billion, with earnings per share expected to rise by 1.6% year-on-year to $2.58.

Lululemon is expected to maintain growth momentum in the first quarter of fiscal year 2025, covering multiple channels, regions, and product categories. This growth is primarily driven by positive consumer response to products, increased foot traffic in stores, and strong online sales performance.

The momentum in international markets (including mainland China and other regions) will also provide strong support for the company, as the brand is widely popular globally. Lululemon is leveraging its "Power of Three x2" growth strategy—focusing on product innovation, customer experience, and market expansion—to achieve accelerated development. Brand activities and community events have also effectively enhanced brand awareness and loyalty, which is expected to support the company's performance.

During the fourth-quarter earnings call for fiscal year 2024, Lululemon's management expressed strong confidence in the growth of international business, particularly in mainland China. Models predict that Lululemon's international revenue in the first quarter will increase by 2.3% year-on-year.

However, at the same time, Lululemon is facing challenges from the inflationary environment and rising interest rates, which have weakened consumer spending on non-essential items, particularly the softness in women's apparel affecting its performance in the Americas market. Despite the strong appeal of new products, the company still faces issues with foot traffic and sales growth in the North American market, necessitating a faster recovery pace.

Additionally, tariff issues are putting pressure on profit margins. The company's management expressed concerns during the last quarter's earnings call about the impact of tariffs on imported goods from Mexico and China, believing this will drive up costs and affect the performance in the first quarter of fiscal year 2025 and beyond.

The company expects the gross margin in the first quarter to remain flat year-on-year, as product gross margins show slight improvement but are offset by the leverage effect of fixed costs; discount rates are expected to be roughly in line with the same period last year; operating profit margins are expected to decline by 120 basis points year-on-year.

Data shows that over the past three months, Lululemon's stock price has fallen by 8.9%, underperforming the industry average decline of 6.9%. Currently, Lululemon's stock price is $317.09, which is 40.3% higher than the 52-week low of $226.01, but still 25.1% lower than the 52-week high of $423.32. Additionally, in terms of valuation, the stock's expected price-to-earnings ratio for the next 12 months is 20.74 times, higher than the industry average of 12.72 times. This high valuation indicates that investors have high expectations for Lululemon's future growth, but it also means that the current valuation may be high, and some investors may choose to wait for a more ideal buying opportunity.

Overall, regardless of how the stock price fluctuates after the first-quarter earnings report is released, Lululemon's long-term growth logic remains solid, thanks to continuous product innovation, expanding global demand, and the steady advancement of the "Power of Three x2" strategyAlthough inflation, interest rates, tariffs, and a weak American market will pose challenges to profits and growth in the short term, these issues are more cyclical than structural.

Fundamentally, Lululemon remains a high-quality company with solid profitability and forward-looking strategies. While the current high valuation may cause some investors to hesitate, for long-term holders, maintaining their positions may yield returns, as its strategic deployment and international growth will continue to unlock value