Lululemon: Davis Double Kill! Can the 'Little Black Pants' Hold Up?

$Lululemon(LULU.US) Lululemon released its Q2 2025 earnings report (ending June 2025) after the U.S. stock market closed on September 5, 2025, Beijing time. Overall, Lululemon's performance this quarter was still disappointing. Despite the company having lowered its guidance last quarter, this quarter's results still fell short. What worries the market even more is that the company has once again lowered its full-year revenue guidance from 5%-7% to 2%-4%, causing the stock price to plummet by more than 15% after hours. Key information includes:

1. Revenue fell short of market expectations. In Q2 2025, Lululemon achieved revenue of $2.52 billion, a year-on-year increase of 6.4%. Not only did it fail to meet last quarter's guidance of 7%-8%, but the market is also concerned that the company has once again lowered its full-year revenue guidance from 5%-7% to 2%-4%. In terms of profit, the company had already emphasized the erosion of profits due to tariffs and discounts last quarter, so from an actual profit perspective, it barely met expectations.

2. The performance in the North American home market remains disappointing. By region, North America achieved revenue of $1.76 billion in Q2, a year-on-year increase of 1%, and the trend remains in a continuous decline. Although management attributed the decline in growth to decreased store traffic and weakened consumer power, Dolphin Research has mentioned that in the absence of growth in menswear, maintaining low single-digit growth in North America through existing product iterations is basically the norm. The only relatively bright spot is that the China region achieved revenue of $440 million in Q2, a year-on-year increase of 23.8%, showing an improvement over Q1. Dolphin Research speculates that the core reason is that the Lululemon Align 10th anniversary celebration in Q2 increased interaction with consumers domestically, boosting conversion rates.

3. Menswear still struggles to gain traction. By category, women's wear achieved revenue of $1.55 billion in Q2, a year-on-year increase of 4.8%, marking the lowest growth rate in three years amid competition from brands like Alo Yoga and Vuori, and after core consumer penetration has ended, growth in women's wear can only be maintained through new product launches and iterative innovation of old products. Menswear achieved revenue of $630 million, a year-on-year increase of 6.4%, also failing to meet market expectations, with its share of total business remaining almost unchanged from the same period last year at about 25%, indicating that consumers are still not very receptive to menswear.

4. Store opening pace has accelerated. As of Q2 2025, the company had a total of 784 stores worldwide, with a net increase of 14 stores quarter-on-quarter. In line with the company's year-end 2025 store opening plan to open 40-45 new stores globally, the pace of store openings in Q2 has clearly accelerated, focusing mainly on international markets, with China being the main driver of store openings, targeting economically strong regions like the Yangtze River Delta and Pearl River Delta (Kunshan, Yiwu).

5. Gross margin slightly declined. On one hand, facing intensified competition and weak demand in North America, the company increased discount efforts. On the other hand, tariffs that took effect in April, with Lululemon's major production bases in Asia, including Cambodia and Vietnam, facing tariffs of over 40%, raised supply chain costs, which also lowered the company's gross margin, ultimately resulting in a year-on-year decline of 1.1 percentage points to 58.5%.

6. Expense ratio slightly increased. In terms of management expenses, although employee salaries increased (with intensified international recruitment) and supply chain adjustments (such as warehouse upgrades and industry transfers) were made, the company alleviated some pressure in Q2 through organizational structure optimization. In terms of sales expenses, due to increased promotional spending for the global Align™ 10th anniversary celebration in Q2, the company enhanced promotional efficiency through increased digital transformation (such as increasing the proportion of social media promotion), ultimately raising the overall expense ratio by 0.9% to 37.7%, with Dolphin Research estimating the core operating profit margin at 20.8%, a decline of 2 percentage points.

7. The company has lowered its full-year guidance. From the guidance, the company expects Q3 revenue to grow by 3%-4% year-on-year, and has lowered the full-year guidance from 5%-7% to 2%-4%, reflecting the company's pessimistic outlook for the year.

8. Overview of core financial information

Dolphin Research's overall view:

Overall, the disappointing Q2 results, coupled with the further downward revision of the full-year guidance, led to an estimated post-market drop of over 15% in the company's stock price. The core issue is that neither the current quarter's performance nor the company's future guidance shows signs of marginal improvement in growth, thus continuing to depress valuations.

In fact, since Lululemon began expanding into menswear and accelerating internationalization 10 years ago, it has attempted to "walk on two legs" to compensate for the slowdown in growth after reaching the bottleneck of single-category and single-market penetration. However, it seems that the share of menswear in the company's business has peaked at no more than 25%, and it hasn't taken off. Although international business still maintains relatively high growth, its small scale currently does not significantly drive the company's overall performance, ultimately leading to the current double whammy.

From a deeper perspective, Lululemon's rapid development, apart from its solid "little black pants" and community marketing strategy, also largely benefited from the era's yoga movement boom. As the era's dividends fade and generational and aesthetic changes occur, a slowdown in Lululemon's business is inevitable.

Chip Wilson's initial brand positioning of "super girls" was roughly between 24-35 years old. After more than 20 years of development, combined with research information, the aesthetic preferences of "Super Girls" have gradually shifted from "high performance" to multi-scenario applicability, providing entry opportunities for new brands like Vuori and Alo Yoga:

For example, Alo Yoga targets "It girls" (young women with fashion influence and trendiness, recognized as trendsetters) through social media marketing on Instagram and TikTok, focusing on fashion. Additionally, by opening stores around Lululemon, it directly diverts traffic from Lululemon's stores. According to research information, competitors Vuori and Alo Yoga have captured about 15% of Lululemon's market share in North America.

Similarly, in China, when Lululemon first entered in 2013, it coincided with an economic upturn, making it easier to inspire brand recognition among women. In the economic transition phase, although Dolphin Research personally feels that Lululemon's yoga pants do not have a complete substitute, in a consumption downgrade environment, if similar yoga pants can achieve 70-80% of Lululemon's comfort at a lower price, they will naturally eat into Lululemon's market share.

Finally, from a valuation perspective, under the dual pressure of revenue falling short of expectations and guidance downgrades, after a 15% post-market drop, the corresponding 2026 valuation is roughly 11x. Compared to Dolphin Research's estimate of single-digit growth over the next three years, the space for valuation compression is clearly much smaller than last quarter, but without a change in the company's growth logic, Dolphin Research believes there is more short-term rebound value after bottom-fishing, and a sustained upward turning point seems premature at present.

I. Investment Logic Framework

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

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

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

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

II. Revenue fell short of expectations

In Q2 2025, Lululemon achieved revenue of $2.52 billion, a year-on-year increase of 6.4%, not only failing to meet last quarter's guidance of 7%-8%, but also causing market concern as the company once again lowered its full-year revenue guidance from 5%-7% to 2%-4%. In terms of profit, the company had already emphasized the erosion of profits due to tariffs and discounts last quarter, so from an actual profit perspective, it barely met expectations.

II. Menswear still struggles to gain traction

By category, women's wear achieved revenue of $1.55 billion in Q2, a year-on-year increase of 4.8%, marking the lowest growth rate in three years, slightly below market expectations. In the core category of yoga pants, the old problem persists: amid competition from brands like Alo Yoga and Vuori, and after core consumer penetration has ended, growth in women's wear can only be maintained through new product launches and iterative innovation of old products.

The positive aspect is that after organizational restructuring, Lululemon's pace and speed of new product launches in North America in Q2 have basically returned to historical averages, on one hand, by adding various colors and styles to the GlowUp series, which was popular in Q1, and on the other hand, the Daydrift casual pants, which sold out in Q1 and were restocked in Q2, maintained relatively high popularity, but it can be confirmed that Lululemon's high-growth phase relying on yoga pants is essentially over.

In Q2 2025, menswear achieved revenue of $630 million, a year-on-year increase of 6.4%, also failing to meet market expectations, with its share of total business remaining almost unchanged from the same period last year at about 25%. From recent actions, it is clear that Lululemon places importance on menswear: on one hand, by increasing store space to provide a comprehensive menswear product line to enhance exposure. Additionally, in terms of categories, the company is expanding around the "gym to office" scenario to attract non-core sports users, but the final effect seems to be that consumers are not very receptive.

Combining this with Lululemon's "Power of Three×2" new five-year growth plan proposed in 2022, aiming to double men's business revenue by 2026, corresponding to a compound annual growth rate of over 15%, the current progress is clearly below expectations. The core issue remains that, as Dolphin Research has repeatedly emphasized, the lack of a blockbuster product similar to the "little black pants" in menswear leads to low brand recognition and lack of distinctiveness.

In other business areas (including accessories, bags, footwear, and lifestyle products, which are non-core categories), benefiting from the Align™ 10th anniversary global celebration (Yoga Carnival), consumer purchases of Lululemon peripheral products have increased. According to research information, yoga mats and bags performed well, achieving overall revenue of $360 million, a year-on-year increase of 18.1%.

III. China region is the "leading brother"

By region, North America achieved revenue of $1.76 billion in Q2, a year-on-year increase of 1%, and the trend remains in a continuous decline. Although management attributed the decline in growth to decreased store traffic and weakened consumer power, Dolphin Research has mentioned that in the absence of growth in menswear, maintaining low single-digit growth in North America through existing product iterations is basically the norm.

The only relatively bright spot is that the China region achieved revenue of $440 million in Q2, a year-on-year increase of 23.8%, showing an improvement over Q1. Dolphin Research speculates that the core reason is that the Lululemon Align™ 10th anniversary celebration was held in cities like Beijing, Shanghai, Hangzhou, and Tianjin, where international yoga masters and brand ambassadors led consumers in yoga activities, increasing connection with consumers and significantly boosting sell-through and conversion rates.

Other markets outside China achieved revenue of $330 million, a year-on-year increase of 19.2%, below market expectations. According to research information, benefiting from the launch of the new GlowUp series, Japan and Australia in the Asia-Pacific region showed relatively strong growth, while Europe was slightly slower than Asia-Pacific due to macroeconomic factors.

IV. Store opening pace has accelerated

As of Q2 2025, the company had a total of 784 stores worldwide, with a net increase of 14 stores quarter-on-quarter. In line with the company's year-end 2025 store opening plan to open 40-45 new stores globally, the pace of store openings in Q2 has clearly accelerated, focusing mainly on international markets.

China is the main driver of store openings, targeting economically strong regions like the Yangtze River Delta and Pearl River Delta (Kunshan, Yiwu). Additionally, Lululemon has upgraded some stores in North America to enhance single-store efficiency.

From the same-store sales growth perspective, apart from North America, which still shows no improvement, growth in China and other international markets has rebounded quarter-on-quarter compared to Q1, with China benefiting from the Align™ 10th anniversary celebration, achieving a same-store sales growth rate of 16%, returning to double-digit growth.

From a channel perspective, online growth reached 9%, showing some recovery quarter-on-quarter, far exceeding the 3.2% growth of offline stores. Dolphin Research speculates that the core reason is that Lululemon's online discount rate is relatively high, diverting some offline consumers.

V. Gross margin slightly declined due to tariffs

On one hand, facing intensified competition and weak demand in North America, the company increased discount efforts. On the other hand,

tariffs that took effect in April, with Lululemon's major production bases in Asia, including Cambodia and Vietnam, facing tariffs of over 40%, raised supply chain costs, which also lowered the company's gross margin, ultimately resulting in a year-on-year decline of 1.1 percentage points to 58.5%.

VI. Expense ratio slightly increased

In terms of management expenses, although employee salaries increased (with intensified international recruitment) and supply chain adjustments (such as warehouse upgrades and industry transfers) were made, the company alleviated some pressure in Q2 through organizational structure optimization (such as back-office layoffs).

In terms of sales expenses, due to increased promotional spending for the global Align™ 10th anniversary celebration in Q2, the company enhanced promotional efficiency through increased digital transformation (such as increasing the proportion of social media promotion), ultimately raising the overall expense ratio by 0.9% to 37.7%, with Dolphin Research estimating the core operating profit margin at 20.8%, a decline of 2 percentage points.