Dive Brief:
- Lululemon reported a rough Q2 Thursday, as sales of its signature leggings plunged 20% compared to last year. Net revenue fell 4% to $2.4 billion overall, and 8% in the Americas. Comps fell 9% overall and 12% in the Americas.
- Gross margin expanded by 200 basis points to 60.5%, including 560 basis points from $134.5 million in tariff refunds. Net income declined over 11% to $329 million.
- The retailer said it would open fewer stores and pop-ups than planned and reined its expectations for the year. Lululemon now plans 35 net new store openings in 2026, down from 40, and only about 40 pop-ups, compared to 65 at the end of last year.
Dive Insight:
Heidi O’Neill, a three-decade Nike veteran, arrives next week as Lululemon’s new chief executive, and has her work cut out for her.
“When Heidi O'Neill finally takes the helm as Lululemon CEO next week, she will be in the unenviable position of leading a company that is in a worse position than when she accepted the job,” Emarketer principal analyst Sky Canaves said in emailed comments Thursday.
The athleisure stalwart has struggled this year, even after taking steps to introduce new styles and clear out SKUs. The trouble continues, Chief Financial Officer Meghan Frank, who is serving as interim co-CEO, told analysts Thursday. Net revenue in Q3 is expected to fall 10% to 11%.
“As we move into Q3, while we are seeing good guest reaction to our activations and some of our newer styles, the overall response to our product launches remains inconsistent,” she said. “And we've continued to see pressure on the brand in both of our largest markets,” the Americas and China.
That led to another downgrade of expectations for the year. The company now expects net revenue to fall as much as 7%, reaching $10.35 billion to $10.5 billion. Lululemon already had lowered guidance in June, reducing its estimates from a 2% to 4% revenue gain to a decline of as much as 1%.
The decline in sales of its flagship product is no small matter, as leggings probably contribute about a third of overall revenues and carry the highest margins, according to BNP Paribas analysts led by Laurent Vasilescu.
“We did a double take when lulu called out that leggings were down 20% in 2Q,” he said in a research note Friday, though that reinforces the team’s thesis that consumers have turned away from athleisure. “We could see multi quarter and even multi year declines as the consumer moves away from leggings.”
Lululemon’s turnaround is likely to take a while, as O’Neill will need some time to assess the situation and devise a strategy, several analysts said. In fact, having a new CEO only adds uncertainty, according to a Friday note from William Blair analysts led by Sharon Zackfia.
Jefferies analysts led by Randal Konik called for O’Neill to pause brick-and-mortar expansion, “make the color palette normal again,” prioritize the Americas business, tighten inventory, refocus on core merchandise, cut costs and “fix the culture.”
“She joins next week and inherits negative traffic, a bloated cost base, and no 2027 guidance until March,” they said.
