INTRO
Lululemon beat expectations this quarter. Revenue came in ahead of estimates, EPS topped forecasts, and China delivered a standout performance. On the surface, a decent result.
Then they gave their 2026 guidance, and the stock fell off a cliff.
Here's what happened.
The Numbers: A Beat With a Catch
- Revenue: $3.64 billion, up 1% year-over-year, beat estimate of $3.58 billion
- Diluted EPS: $5.01, beat estimate of $4.79, but down 18% from $6.14 a year ago
- Full-year FY2025 revenue: $11.1 billion
- Gross margin: 54.9%, down 550 basis points year-over-year
- US revenue (Q4): Down 6%
- China mainland comparable sales (Q4): Up 26%
- Digital revenue: $1.9 billion, more than half of total quarterly revenue
- FY2026 EPS guidance: $12.10–$12.30, down from $13.26 earned in FY2025
- FY2026 revenue growth guidance: Just 2% to 4%
When a company beats the quarter but guides down for the full year, investors sell the stock, because they're not buying what happened last quarter, they're buying what happens next. Lululemon essentially told the market: the next twelve months are going to be harder, not easier. That's why the stock is down over 50% in the past year despite reporting a beat. A "beat" only means something if the future looks good. Right now it doesn't.
The US Problem
Lululemon built its reputation and the vast majority of its business in North America. That engine is stalling. Americas revenue was flat for the full year, and US revenue declined 6% in Q4. The brand that once had customers queuing for leggings is now using markdowns and promotions to move inventory, something Lululemon almost never did historically.
Management says it's pulling back on discounting deliberately, accepting short-term sales pain to protect the brand's premium positioning over time. That's the right strategic call. But it means the near-term numbers will look worse before they look better.
Lululemon built its entire business on the idea that it never needed to discount. People paid full price because the product was worth it and the brand had genuine cultural heat. The moment you start offering promotions, you train customers to wait for the sale, and that's very hard to undo. Management knows this. The question is whether they can restore full-price discipline without losing the customers who've now gotten used to deals.
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The China Bright Spot
While the US struggles, China is doing something remarkable. Comparable sales up 26% in Q4. International revenue grew 22% for the full year. This is becoming a genuine second engine for the business rather than a footnote.
This runs counter to what most Western consumer brands are experiencing in China right now, where economic caution and local competition are squeezing foreign labels. Lululemon appears to have genuine brand traction there, the premium athleisure positioning that's softening in the US still has cultural resonance in Chinese cities.
"Comparable sales" measures sales in stores that were open in both periods, so it strips out the effect of new store openings and just shows whether existing locations are doing more business. A 26% increase in comparable sales is a strong signal that demand is genuinely growing, not just spreading across more shops. China is not a rounding error anymore. It's becoming a core part of the growth story.
The Leadership Vacuum
In January 2026, CEO Calvin McDonald stepped down after nearly eight years. He tripled the company's revenue during his tenure. He also oversaw the "Breezethrough" product failure, leggings pulled from shelves for being too sheer, and a growing sense that the brand had lost touch with its core female customer.
Lululemon is now run by two interim co-CEOs: Meghan Frank (CFO) and André Maestrini (Chief Commercial Officer). No permanent CEO has been named. And founder Chip Wilson, who built Lululemon from a Vancouver yoga studio in 1998, has launched a proxy fight, publicly criticising the discounting strategy and calling the product design stale.
A proxy fight is when a major shareholder tries to force change at a company by convincing other shareholders to vote with them, usually to replace board members or push a new strategic direction. Wilson owns a significant stake in Lululemon and is essentially saying publicly: the people running this company are making the wrong decisions. That's an uncomfortable situation for any management team trying to stabilise a business. It also creates distraction at exactly the moment the company needs focus.
The Tariff Problem
One more headwind that isn't going away: tariffs. Lululemon expects tariff costs of $380 million in FY2026, up from $275 million last year. Most of their manufacturing is in Asia. The end of the de minimis exemption, which previously allowed low-value shipments to enter the US duty-free, adds further cost pressure. Management hasn't fully quantified the tariff impact in their guidance, which means the real numbers could be worse than what they've told investors.
"De minimis" is a trade rule that used to let packages worth under $800 enter the US without import duties. It was widely used by companies manufacturing in Asia. The US government ended this exemption, which means Lululemon now pays tariffs on a much larger portion of its imports. Combined with broader trade tariffs on goods from Asia, this is a meaningful and growing cost, one that's hard to pass on to consumers when you're already trying to pull back from discounting.
The Bottom Line
Lululemon beat Q4 estimates on both revenue and earnings. China is growing fast and becoming a real second engine. Digital now accounts for more than half of quarterly revenue. The brand has genuine global recognition and a loyal customer base, 59 million 88VIP members in China alone.
↑ The Bull Case
The stock is at a multi-year low, trading at a fraction of what it was worth two years ago. Management's decision to pull back on discounting is strategically correct even if it hurts near-term sales. A new permanent CEO with a clear vision could be the catalyst the stock needs. China is growing strongly and international momentum is real. At current valuations, you're being paid to wait for a recovery that, for a brand this strong, seems more likely than not.
↓ The Bear Case
The US business is declining, margins are compressing, and guidance implies earnings will fall meaningfully in FY2026. There's no permanent CEO, a proxy fight brewing with the founder, and unquantified tariff exposure that could make the guidance look optimistic in hindsight. The brand spent 18 months discounting its way through a credibility problem, that damage doesn't reverse overnight. Premium brands are hard to rebuild once customers start expecting deals.
The yoga pants brand built on premium positioning and community is discovering that both are harder to maintain at scale than they looked on the way up. The next CEO will inherit something valuable. What they do with it is the only question that matters now.
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References
- Lululemon Athletica, Q4 FY2025 Earnings Press Release (March 17, 2026)
- CNBC, Lululemon issues weak 2026 guidance as tariffs and proxy fight weigh on outlook (March 17, 2026)
- Motley Fool, Lululemon Q4 2025 Earnings Call Transcript (March 18, 2026)
Ticker: LULU (Nasdaq) · Reported: March 17, 2026 · Period: Q4 FY2025