Shares of athleisure giant Lululemon (NASDAQ: LULU) plummeted 18.59% last week following its quarterly earnings release, worsening its performance for the year. The sharp decline was triggered by weaker-than-expected Q2 results and a reduced full-year guidance, attributed to tariff costs and softening consumer demand in the U.S. market.
This pullback appears to be more of a reset in expectations rather than a fundamental breakdown of the business. But the question for investors now is: should they stay away for the time being, or is this a buying opportunity?
Lululemon’s Q2 revenue increased approximately 7% year-over-year to $2.53 billion (or 6% on a constant-currency basis), down from the 8% constant-currency growth recorded in Q1. More notably, comparable sales in its core Americas region declined 3% on a constant-currency basis, a steeper drop than the 1% decrease seen in the previous quarter. Earnings per share (EPS) came in at $3.10, down from $3.15 a year earlier.
Performance varied significantly by region: while the Americas experienced a modest decline in comp sales, international markets saw robust growth with a 15% increase (13% on a constant-currency basis).
The company revised its full-year revenue outlook downward to $10.85–$11.0 billion, from the previous range of $11.15–$11.30 billion. Similarly, EPS guidance was sharply reduced to $12.77–$12.97, compared with $14.58–$14.78 provided just one quarter ago. Two primary factors drove this downgrade: first, recent tariff changes and the removal of the de minimis exemption are putting pressure on gross profit; second, demand in the U.S. has softened due to an over-reliance on a few long-running product successes.
The slowdown in the U.S. is particularly critical as it remains Lululemon’s profit engine. Although strong double-digit growth in international markets can support overall results, a revenue mix skewed toward lower-margin regions could compress margins and heighten the importance of inventory and markdown discipline. The company’s ability to maintain pricing power without heavy promotion will be a key indicator to watch over the next two quarters.
Management has quantified a significant gross profit impact from tariffs this year. Even if some relief is achieved through sourcing adjustments and pricing strategies, the drag will be quickly visible in gross margin figures. This context explains the guidance cut and the stock’s sharp reaction despite the company having delivered a profitable quarter.
The central question is whether the current stock price fairly reflects these pressures. Following the drop, Lululemon is trading at a forward P/E ratio of just 13 based on 2025 EPS estimates. If the company can stabilize store traffic in the U.S., introduce successful new products to accelerate sell-through, and manage tariff impacts without aggressive discounting, the current valuation may appeal to patient investors. This path does not require extraordinary performance—just steady execution.
Three key markers will be crucial: first, signs of stabilization in U.S. demand; second, sequential improvements in gross margin indicating better sourcing and pricing control; and third, healthy inventory quality reducing markdown risks and supporting margin recovery. If these factors align with continued international momentum, market sentiment could improve faster than anticipated.
However, the fashion industry is notoriously fickle, and tariff policy risks remain outside management’s control. The tariff overhang may extend beyond the holiday season. If product refreshes fail to resonate, Lululemon may need to increase promotions to protect market share, further pressuring earnings and the stock’s valuation. While the brand’s long-term strength remains intact, near-term performance depends on variables that are still unfolding.
In summary, while Lululemon no longer looks expensive after the sell-off and much of the bad news appears priced in, the company still faces clear execution challenges in the U.S. and ongoing tariff-related profit headwinds. Investors may be better off waiting for more definite signs that the reset is taking hold before buying the dip.
