Lululemon's China Cooldown And US Struggles Weigh On Outlook

Core Viewpoint - Lululemon Athletica's growth outlook in the U.S. has softened due to a shift in consumer preferences towards new fabric innovations, leading to a downgrade from Overweight to Neutral by JP Morgan analyst Matthew R. Boss, with a price forecast reduction from $303 to $224 [1][2]. Group 1: Product Performance and Market Trends - The U.S. product catalyst launch has been postponed to the second half of 2025 as customers favored new fabric innovations like Align No Line and Be Calm, while showing less interest in Updated Core-Seasonal colors, which constitute approximately 40% of inventory [2]. - Second quarter U.S. revenue growth is now projected at +1.2% year-over-year, a decrease of 50 basis points from the first quarter's +1.7%, reflecting a +1.0% two-year stack, as around 80% of the product assortment faces conversion challenges [3]. - The U.S. premium activewear market is experiencing a slowdown, with Euromonitor forecasting only 1.0% growth in U.S. sports apparel for 2025/26, compared to 11.0% growth in FY21-FY24 [5]. Group 2: Management Strategies and Financial Outlook - Management plans to enhance investments in the second half of 2025, including expanding Align No Line to all stores by September and utilizing air freight to expedite inventory deliveries, indicating confidence in first quarter metrics and the U.S. women's business [4]. - Increased markdowns due to product assortment challenges and higher fixed cost leverage across operating expenses and SG&A are expected to further constrain Lululemon's multi-year margins, contributing to the Neutral rating [7]. Group 3: International Market Potential - Lululemon's international market penetration presents a significant growth opportunity, although recent analyses indicate a more normalized growth pace in Mainland China, which was previously viewed as a strong growth driver [6].