Lululemon is facing significant challenges as its sales momentum dwindles, prompting changes to its store expansion strategy. With a staggering 20% drop in sales for its popular leggings in the second quarter, the company has scaled back its plans for new store and pop-up openings. The athleisure brand now aims to open 35 new stores by 2026, a decrease from the 40 initially planned, and about 40 pop-ups instead of last year’s figure of 65. Their financial outlook for the year has also been recalibrated.
Declining Sales and Adjusted Projections
In the second quarter, Lululemon experienced a 4% decline in net revenue year-on-year, bringing the figure to $2.4 billion, alongside a notable 8% drop in the Americas. Comparable sales decreased by 9% globally and by 12% in the Americas. Despite a 200 basis point rise in gross margin to 60.5%, buoyed by $134.5 million in tariff refunds that added 560 basis points, net income still dipped over 11% to $329 million.
As the company attempts to recalibrate, it anticipates a 10-11% drop in net revenue for the third quarter. This aligns with the lowered annual revenue expectations of $10.35 billion to $10.5 billion, following a previous guidance revision from a potential revenue increase to a projected 1% decline.
Leadership Transition Amidst Market Pressures
Next week, Heidi O’Neill, Lululemon’s incoming CEO and a seasoned Nike executive, will step into a challenging environment. According to Sky Canaves, a principal analyst at Emarketer, O’Neill will inherit a company facing greater difficulties than when she accepted the role. The interim co-CEO and Chief Financial Officer Meghan Frank highlighted ongoing pressures on Lululemon’s brand in its largest markets—the Americas and China—despite favourable consumer responses to recent product activations and styles.
Analysts like BNP Paribas’s Laurent Vasilescu expressed concerns about the decline in leggings sales, which significantly contribute to Lululemon’s revenue and profit margins. This trend suggests a broader consumer shift away from athleisure, potentially leading to prolonged revenue challenges.
Strategies and Recommendations for Recovery
The transition to new leadership, however, brings added uncertainty, as noted by William Blair analysts led by Sharon Zackfia. Meanwhile, Jefferies analysts, including Randal Konik, suggest that O’Neill should reevaluate the company’s strategic directions—particularly by halting physical expansion, optimizing inventory, reducing costs, and refocusing on essential merchandise. Additionally, they advocate for adjustments in the company’s colour palette and a renewed focus on improving operations in the Americas.
With these strategic shifts and ongoing market pressures, Lululemon’s path to recovery will likely require careful planning and execution under O’Neill’s leadership.
Reporting based on coverage first published by retaildive.com.