Lululemon crashes again? Profits are collapsing too fast, valuation correction is too slow!

$Lululemon(LULU.US) released its Q1 2025 financial report (ending March 2025) after the U.S. stock market closed on the morning of June 6, 2025, Beijing time.

In short, profits fell too quickly, valuations dropped too slowly, leading to issues similar to those tracked by Dolphin Research in China Duty Free—stock prices kept falling, but valuations became increasingly expensive. Specifically, the core information is as follows:

1. Profit side fell short of market expectations. In Q1, Lululemon achieved revenue of $2.37 billion, a year-on-year increase of 7.3%, which was basically in line with market expectations and fell within the upper limit of the company's guidance for the previous quarter, representing a low growth rate within expectations.
However, due to intensified industry competition and the need to expand overseas markets, the company proactively increased its expense investment. Although gross profit met expectations, the final net profit margin fell to 13.3%, the lowest level in nearly three years.

2. High-growth international market slowed down. By region, as Lululemon's home market, North America grew by 3.2% year-on-year, maintaining a trend similar to the growth rate in 2024. Combined with information from the conference call, the average transaction price per customer increased in Q1, indicating that the decline in sales was the main reason for the slowdown in North American growth.

The China region grew by 19% year-on-year, significantly slowing down from the high growth rate of over 35% in the previous two years. Dolphin Research speculates that this is related to intensified competition in the Chinese market (Lululemon's largest competitor in North America, Alo Yoga, entered China, with a high overlap in customer base) and the overall consumption level in second-tier and lower-tier markets not reaching the standard of first-tier cities.

Other markets outside China grew by 18.5% year-on-year, with growth rates also significantly declining, but this also indirectly confirms that Lululemon's performance slowdown is somewhat related to macroeconomic pressures.

3. Poor performance in menswear. By category, women's wear achieved revenue of $1.54 billion in Q1, a year-on-year increase of 7%. The slowdown in women's wear growth was expected given the limited penetration of core categories like yoga pants.

From the perspective of expectation differences, despite the company's significant investment in developing the menswear business over the past two years, the results show that menswear only grew by 8% year-on-year, with no increase in its share of overall business. Therefore, Dolphin Research believes Lululemon's menswear business performed very poorly.

4. Store opening pace slowed down. As of Q1, the company had a total of 770 stores worldwide, with a net increase of 3 stores quarter-on-quarter. Combined with the company's year-end 2025 store opening plan, which aimed to open 40-45 new stores globally, the pace of store openings in Q1 was noticeably slow.

Dolphin Research speculates that the company's focus in Q1 was on upgrading existing stores, attempting to optimize customer experience and improve store efficiency through "small store to large store" transformations. From the growth rate of various channels, offline direct-operated stores only grew by 7.7% year-on-year, falling to single-digit growth for the first time, while e-commerce growth remained stable.

5. Reduced promotions, increased average transaction price, but increased expense investment. According to information from the conference call, Lululemon's newly launched high average transaction price category, the Daydrift high-waisted long pants series, performed well in Q1, combined with reduced promotional scenarios, the company's gross profit margin reached 58.3% in Q1, an increase of 0.6% year-on-year.
However, due to intensified competition, the company proactively increased marketing expenses to attract new customer groups, leading to an increase in expense ratio, causing core operating profit and net profit to fall short of market expectations.

6. The company lowered its full-year operating profit margin guidance. From the guidance, although the full-year revenue guidance remains unchanged, Lululemon's guidance for operating profit margin was further lowered from a year-on-year decrease of 100 basis points to a decrease of 160 basis points, with core concerns about the impact of tariffs effective from April on the company's supply chain costs.

7. Overview of core financial information

Dolphin Research's overall view:

Judging solely from the company's Q1 overall financial indicators, apart from expenses slightly exceeding market expectations, the overall performance was actually within the expected slowdown. However, from the market's reaction, Dolphin Research believes the biggest issue with the 22% post-market plunge is that Lululemon's growth logic is damaged, and entering a low-growth period requires continuous valuation reduction.

Additionally, although the company lowered its full-year profit guidance due to the impact of tariffs effective from April, looking at all U.S. sportswear brands, whether it's GAP, Nike, or UA (Under Armour), most production processes are completed in Southeast Asia and Chinese factories.

Therefore, the impact of tariffs on their profitability is mentioned in the financial reports, which is a common industry risk, but from historical experience, the impact of tariffs on company profitability is only temporary. Therefore, Dolphin Research is more concerned about Lululemon's growth issues.

Dolphin Research analyzed in "LULULEMON: Just a pair of black pants, why break through? " that Lululemon's past success was built on identifying the "pain points" of women practicing yoga and driving product power through extreme fabric technology, differentiating itself in the yoga pants niche and enjoying the industry dividend as the "first to eat the crab" in creating the yoga pants category.

However, after completing the transition from 0 to 1 and growing to the leader in the niche, the brand focusing on the niche must find new growth drivers in the process from 1 to 10. Generally, growth drivers come from either horizontal category expansion or international market expansion. Lululemon clearly chose to walk on two legs here.

But from the perspective of category expansion, menswear, as the company's bet on the second growth curve, this performance again shows that the menswear business has not improved, and instead, its growth rate "fell" to be basically the same as women's wear. The market will certainly punish this performance with valuation reduction, which is Dolphin Research's real concern.

Looking at the growth history of various sportswear brands, whether it's LULU's yoga pants, UA's compression shirts, or HOKA's thick-soled shoes, starting from a single category, truly creating a second growth curve through cross-category expansion is not easy. The reason is that, apart from revolutionary innovations like "little black pants" fabric, it is not easy to change consumers' original brand perception through general fabric innovation and functional needs.

Finally, from a valuation perspective, despite the 22% pre-market plunge, the current corresponding 2025 valuation is still close to 17x, which is high compared to Dolphin Research's forecast of single-digit profit growth over the next three years.

Although Dolphin Research acknowledges that Lululemon's little black pants are strong, with unique community marketing, customer stickiness is stronger than ordinary sportswear companies, allowing for some valuation premium. However, to leave enough safety margin, Dolphin Research suggests considering entry only when it falls to around 15x, corresponding to a stock price below 285.

I. Investment Logic Framework

According to the company's disclosure, Lululemon's revenue mainly comes from women's wear, men's wear, and other three businesses. We will briefly introduce these three businesses for further analysis later.

Women's wear: The company's performance pillar. Lululemon's women's wear business has been the core revenue source since the brand's inception, currently accounting for over 60% of revenue. From Lululemon's women's wear product line, a product matrix has been formed with yoga pants as the core, supplemented by hoodies, jackets, T-shirts, etc., covering basic styles for indoor sports & daily leisure scenes based on different fabrics.

Men's wear: Late start, second growth curve. Lululemon entered the men's wear business in 2013, copying the successful formula of women's wear by focusing on fabric, emphasizing comfort + fashion. Due to the low base of men's wear, its growth rate has been higher than women's wear in recent years. In the 2022 five-year growth plan, management proposed to double the men's wear business by 2026.

Other: High-profit margin supplementary business. LULU's other businesses include footwear, sports accessories, and Lululemon Studio (fitness experience platform). Although smaller in scale compared to men's & women's wear, they have higher profit margins & growth rates. Among them, the footwear business is a new track opened by Lululemon in 2022, which management attaches great importance to, but it is still in the early stages with a small scale.

II. Revenue side slowed as expected, profit fell short of market expectations

In Q1, Lululemon achieved revenue of $2.37 billion, a year-on-year increase of 7.3%, which was basically in line with market expectations and fell within the upper limit of the company's guidance for the previous quarter, representing a low growth rate within expectations.

However, due to intensified industry competition and the need to expand overseas markets, the company proactively increased its expense investment. Although gross profit met expectations, the final net profit margin fell to 13.3%, the lowest level in nearly three years.

II. "Second growth curve" still sluggish?

By category, women's wear grew by 7% year-on-year, in line with expectations. In the core category of yoga pants, the old problem persists: on one hand, facing competition from brands like Alo Yoga and Vuori, and on the other hand, some young North American consumers are shifting their consumption concept towards affordable imitations, facing penetration bottlenecks in North America.

However, according to information from the conference call, the positive aspect is that Lululemon has restored the speed of new product iterations to normal levels through organizational structure adjustments (enhanced synergy between design and merchandise departments). The new Daydrift high-waisted long pants leisure series and Glow Up series sports models launched at the end of last year received positive consumer feedback, but based on channel research information, the overall penetration rate of new products is still lower than the historical average.

In Q1, men's wear achieved revenue of $550 million, a year-on-year increase of 8%, similar to the growth rate of women's wear. However, from the results, men's wear only grew by 8% year-on-year, with no increase in its share of overall business. Therefore, Dolphin Research believes Lululemon's menswear business performed poorly.

Men's wear was originally planned as the company's second growth curve. In Q1, the first independent men's wear store in Asia Pacific was opened in Beijing, and the display in other ordinary stores was adjusted to have men's and women's wear areas each occupy 50% (previously, men's wear area only occupied about 30%). Marketing efforts were also intensified, continuously signing multiple male sports ambassadors (such as golfer Min Woo Lee and NBA player Jordan Clarkson).

From the actual performance, men's wear did not succeed, and the core issue is that Lululemon's men's wear currently lacks a blockbuster single product similar to "little black pants". It is more of a dependent business, relying on the brand power or traffic of women's wear.

Additionally, the newly opened footwear business (included in other categories) is still small in scale, although some new products (casual shoes Cityverse, running shoes Beyondfeel) received good consumer feedback, they do not contribute significantly to overall performance.

III. Did the international market "drop the ball" too?

By region, North America grew by 3.2% year-on-year in Q1, representing a low growth rate within expectations.

The company attributed the slowdown in North America to macro pressures causing U.S. consumers to be more cautious and reduce non-essential spending. However, Dolphin Research believes the core factor is that Lululemon's core category—yoga pants—has already achieved basic penetration among core groups in North America, and the second curve, menswear, has not supported growth.

In Q1, the China region grew by 19% year-on-year, significantly slowing down from the high growth rate of over 35% in the previous two years. Dolphin Research speculates that this is related to intensified competition in the Chinese market (Lululemon's largest competitor in North America, Alo Yoga, entered China, with a high overlap in customer base) and the overall consumption level in second-tier and lower-tier markets not reaching the standard of first-tier cities.

Combined with Lululemon's actions in China over the past two years, on one hand, accelerating store expansion in second-tier and lower-tier cities, and on the other hand, gradually abandoning the principle of not discounting, offering discounts on some products. Although this will increase the company's performance in the short term, the potential risk is that the brand's tone may be damaged.

Other markets outside China grew by 18.5% year-on-year, with growth rates also significantly declining. Despite this, Dolphin Research believes international expansion is still Lululemon's best choice. Compared to category expansion, entering more international markets with the existing strong product power of "little black pants" to increase market share should be a more easily achievable growth path.

IV. Store opening pace slowed, focusing on improving store efficiency

As of Q1, the company had a total of 770 stores worldwide, with a net increase of 3 stores quarter-on-quarter. Combined with the company's year-end 2025 store opening plan, which aimed to open 40-45 new stores globally, the pace of store openings in Q1 was noticeably slow. Dolphin Research speculates that the company's focus in Q1 was on upgrading existing stores, attempting to optimize customer experience and improve store efficiency through "small store to large store" transformations.

From the same-store sales growth rate, although the same-store sales growth rate in all regions declined, it is clear that the decline in China was faster, dropping directly from over 20% to single-digit growth.

In addition to intensified competition in the Chinese market, since Lululemon has been in China for nearly 10 years, the first-tier cities are basically saturated, and the company is currently increasing efforts to open stores in lower-tier markets. Therefore, Dolphin Research speculates that it may be related to the penetration rate of yoga pants among Chinese consumers approaching a bottleneck.

V. Product structure optimization, slight increase in gross profit margin

According to information from the conference call, Lululemon's newly launched high average transaction price category, the Daydrift high-waisted long pants series, performed well in Q1, combined with reduced promotional scenarios, the company's gross profit margin reached 58.3% in Q1, an increase of 0.6 percentage points year-on-year.

However, due to tariffs effective from April, and Lululemon's major production bases in Asia, including Cambodia, Vietnam, and Indonesia, facing taxes of over 40%, the increase in supply chain costs will naturally lower the company's gross profit margin. Therefore, from a full-year perspective, the gross profit margin is likely to be high in the first half and low in the second half.

VI. Increased expense investment, profit side fell short of expectations

In terms of expense investment, due to intensified competition, the company proactively increased marketing expenses to attract new customer groups, with marketing and management expense ratio soaring to 40%, setting a single-quarter high in three years, meaning that most of the 58% gross profit margin was given back as marketing expenses.

This caused core operating profit & net profit to slightly fall short of market expectations, with operating profit margin at a mere 19%, at a historical low.

Combined with information from the conference call, from the perspective of the company's guidance at the end of last year, the company expected to increase the marketing expense ratio by 0.5-1 percentage points in 2025. Therefore, the increase in sales expense investment driving the expense ratio was expected, but it is still disappointing to see it rise so high in the context of poor performance.