Lululemon Cuts Outlook Amid Demand Slump Despite Tariff Gains
Lululemon’s Q2 revenue dropped 4% to $2.4 billion as tariffs were offset by weak demand, prompting a lowered fiscal 2026 outlook.
Lululemon Athletica Inc. reported second-quarter fiscal 2026 revenue of $2.4 billion, a 4% year-over-year decline. The company attributed the drop to weaker underlying demand, with comparable sales falling 9% and 10% on a constant-dollar basis. This softness in consumer activity masked the financial impact of recent trade policy changes, creating a complex picture of operational performance.
Despite the revenue contraction, Lululemon recognized $134.5 million in IEEPA tariff refunds and $4.1 million in associated interest. These one-time gains boosted diluted earnings per share by $0.86. While this support improved reported profitability, it did not reverse the broader trend of margin pressure driven by markdowns and fixed-cost deleverage.
Tariff Refunds Mask Margin Erosion
Gross margin expanded 200 basis points to 60.5%, a figure primarily driven by the tariff refund benefit. Excluding this non-recurring item, product margins remained under strain from persistent tariff costs and inventory markdowns. Operating income fell 13% to $453.7 million, resulting in an operating margin of 18.8%. The company noted that without the refund, gross margins would have faced significant downward pressure.
North America Drives Revenue Decline
The Americas region remained the primary source of weakness, with revenue down 8% and comparable sales falling 12%. In the United States, revenue declined 8%, while Canada saw an 11% drop on a reported basis. International markets provided limited support, with China Mainland revenue rising 4% on a reported basis but falling 2% in constant currency. Rest of World revenue grew 5% reported and 6% in constant currency, offering a modest offset to the North American slump.
Outlook Reflects Persistent Demand Weakness
Lululemon lowered its fiscal 2026 guidance, citing continued pressure on North America trends and margins. The company’s decision underscores the difficulty of offsetting weak traffic and inconsistent product performance with temporary margin benefits. As noted by GN markets/earnings (en-US), the shift in investor focus has moved toward whether these temporary gains can sustainably support the business amid structural demand challenges. The company currently carries a Zacks Rank #5 (Strong Sell), reflecting concerns over its growth and momentum scores.
