Lululemon (Minutes): Future new products will focus on social leisure direction.
$Lululemon(LULU.US) The following are the minutes of Lululemon's Q2 2025 earnings call organized by Dolphin Research. For earnings interpretation, please refer to "Lululemon: Davis Double Kill! Can the 'Little Black Pants' Hold Up?"
I. Review of Core Financial Information:
1. Overall Performance
Total Revenue: $2.5 billion, up 7% year-over-year (6% growth at constant exchange rates).
Comparable Sales: Increased by 1%.
Net Profit: $371 million, diluted earnings per share (EPS) of $3.10 (including a $0.15 impact from stock incentive reversal; excluding this, EPS is $2.95, exceeding the guidance range of $2.85-$2.90).
2. Channels and Categories
Store Channel: Sales increased by 3%, with 784 stores globally, a net addition of 14 stores, and optimization of 6 stores.
Digital Channel: Revenue grew by 9%, contributing $1 billion, accounting for 39% of total revenue.
Category Performance: Men's wear grew by 6%, women's wear by 5%, and accessories and others by 15%.
3. Financial Guidance Update
Full-Year Revenue: $10.85-$11 billion, growth of 2%-4% (excluding the impact of the 53rd week, growth is 4%-6%).
Q3 Expectations: Revenue of $2.47-$2.5 billion, EPS of $2.18-$2.23.
Capital Expenditure: Reduced to $700-$720 million, reflecting more cautious spending management.
II. Detailed Content of the Earnings Call
2.1, Executive Statements on Core Information
1. Performance Summary and Challenges
Earnings per share exceeded expectations, but revenue was below guidance, primarily due to weak performance in the North American market.
Facing structural industry challenges: increased tariff rates, cancellation of de minimis (low-value goods exemption) policy, and more cautious consumer spending.
Core Issues in the U.S. Market: Aging of Lounge & Social products, weak consumer response to classic styles such as Scuba and Softstreme.
2. Product Strategy Adjustment
Problem Diagnosis: Lounge wear accounts for about 40%, with classic styles having overly long life cycles and lacking innovation.
Solution: Increase the proportion of new products: from the current 23% to 35% by spring 2026. Focus on launching new series: Loungeful, Big Cozy, Scuba Waffle, etc. Enhance supply chain agility: shorten time-to-market through rapid design, supplier collaboration, and AI technology (newly appointed Chief AI and Technology Officer).
Design Team Upgrade: Global Creative Director Jonathan Cheung leads the team to inject new vitality.
3. Highlights of International Business
Mainland China: Strong growth, but signs of macro pressure in first-tier cities; full-year growth expectations lowered to 20%-25%.
Other Markets: Steady growth, new entries into Italy, Turkey, Belgium, etc., with plans to open stores in India in the second half of 2026. International business is still in the early growth stage, with significant room for market share and customer base expansion.
4. Tariff and Cost Management
Tariff Impact: Full-year gross margin expected to decline by 300 basis points, with 220 basis points from tariffs and de minimis cancellation.
De Minimis Impact: About two-thirds of U.S. e-commerce orders were previously shipped from Canada enjoying tax exemption, and the policy cancellation brings significant profit pressure.
Countermeasures: Strategic pricing adjustments, supply chain optimization, cost savings.
2.2, Q&A Analyst Questions and Answers
Q: We would like to know more about the plans for product category adjustments. Firstly, what specific measures will be taken in the second half of the year? The market has high expectations for the first half of next year, so what are the expectations for the second half? Additionally, what proportion of sales does lounge wear account for? How do you determine that this part needs adjustment?
A: In terms of products, our team focuses on three key areas: maintaining the growth momentum of sports categories, designing new lounge and social products, and injecting new elements into classic styles. In the second half of the year, new products such as Loungeful and Big Cozy will be launched, with the proportion of new styles increasing from the current 23% to 35% by next spring. Lounge wear accounts for about 40%, with some core series like Scuba and Softstreme facing consumer aesthetic fatigue, while sports products continue to grow, necessitating adjustments to the innovation pace of lounge categories.
Q: Regarding the impact of tariffs, how effective have the recent price adjustments been? Has the recent tariff increase changed the pricing strategy for next year?
A: We have implemented moderate price increases on a small number of products, and the results are in line with expectations. We will continue to use pricing as one of the means to alleviate cost pressures, but will carefully assess consumer elasticity to avoid affecting brand positioning.
Q: Is a 40% proportion of lounge wear ideal? Are there differences in different regions? Why is there fatigue in lounge wear while sports products show more lasting performance?
A: The 60% sports and 40% lounge ratio is a historical benchmark, but will be dynamically adjusted based on feedback from new products. The fatigue in lounge wear is mainly due to insufficient iteration of core series, with consumers preferring innovative styles; while sports products maintain attractiveness through continuous material innovation and functional optimization.
Q: In the 40% lounge category, what proportion of the declining core series is there? When can the scale of innovation in spring new products fully offset the pressure of the existing lounge series?
A: After increasing the proportion of new products to 35%, the focus will be on covering the innovation needs of lounge and social categories, with new products like Daydrift and BeCalm receiving positive feedback, along with subsequent styles like Big Cozy, expected to effectively improve category structure by spring 2026.
Q: What is the current lead time in the supply chain? What is the target reduction? How to drive changes in supply chain processes?
A: By pre-locking fabrics with suppliers and optimizing production schedules, we have shortened the lead time for some styles by up to two months. In the future, we will further enhance agility through technological investment and process reengineering, with the newly appointed Chief AI and Technology Officer driving the application of digital tools.
Q: Will marketing investment increase to enhance brand popularity?
A: Marketing expenses will remain at 5% of revenue, focusing on reaching high-value users through community activities and targeted marketing. Currently, brand health and customer growth data are good, and there is no need to increase the budget.
Q: What is the annual impact of tariffs and de minimis cancellation on gross margin? How to balance pricing and promotion strategies?
A: The tariff-related impact in 2025 is about 220 basis points, with de minimis cancellation accounting for 170 basis points. Pricing measures will cover about half of the cost pressure, while seasonal clearance will digest inventory, but will not change the long-term pricing strategy.
Q: Are tariff countermeasures only targeting the U.S. market?
A: Currently, pricing adjustments are mainly in the North American market, and international markets will be gradually evaluated based on local conditions.
Q: What are the countermeasures for inventory management before adjustments in 2026? What is the specific impact of de minimis cancellation on e-commerce business?
A: By accelerating new product iterations and flexible replenishment mechanisms, inventory is adjusted, with the reorder cycle for some styles already shortened. About two-thirds of U.S. e-commerce orders were shipped through Canadian warehouses, originally enjoying de minimis benefits, and cancellation will increase tariff costs. Future optimization of warehouse layout will alleviate the impact.
Q: What are the latest traffic trends in the U.S. and China markets? Why lower the full-year expectations?
A: The U.S. market performed strongly in May, slowed in July, with declines in both e-commerce and store traffic; China's growth rate is within expectations, but first-tier cities are under slight macro pressure. Expectations are lowered mainly due to slower-than-expected recovery in North America and higher-than-expected tariff costs.
Q: Is there a similar trend of fatigue in the Canadian market as in the U.S.? How is the profitability of stores in the Chinese market? Will the increase in the proportion of new products add markdown pressure?
A: The Canadian market shows signs of cautious consumption due to macro influences, but adjustment measures will also benefit this market. The profitability of Chinese stores is gradually improving with scale expansion, with e-commerce contributing major growth. New product promotion will control discount rates through targeted marketing to avoid excessive markdown.
Q: Does the faster growth of e-commerce over stores reflect changes in consumer shopping habits or the impact of clearance activities?
A: Partly due to seasonal clearance activities concentrated in e-commerce channels, while there is also a trend of increased online shopping preference among consumers, with improved e-commerce conversion rates.
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