lululemon's Q2 Earnings Echo Tariff & Cost Headwinds: Buy Now or Sell?

Core Viewpoint - lululemon athletica inc. (LULU) is expected to report top-line growth in its second-quarter fiscal 2025 results, with sales projected at $2.53 billion, reflecting a 6.9% increase year-over-year [1][10]. Financial Performance - The consensus estimate for fiscal second-quarter earnings is $2.84 per share, indicating a 9.8% decline from the previous year [2]. - lululemon has a trailing four-quarter earnings surprise of 5% on average, but the current model does not predict an earnings beat for this season, with an Earnings ESP of -1.11% and a Zacks Rank of 4 (Sell) [3][4]. Cost and Margin Pressures - The company faces ongoing headwinds from increased tariffs on imports from China and Mexico, which are expected to raise costs and pressure gross margins [5][6]. - For the second quarter, lululemon anticipates a gross margin decline of 20 basis points year-over-year, with SG&A expenses expected to deleverage by 170-190 basis points [7][9]. - The operating margin is projected to decline by 380 basis points year-over-year, contrasting with a growth of 110 basis points in the prior-year quarter [8]. Market Dynamics - lululemon's performance is impacted by a decline in store traffic in the U.S. due to macroeconomic pressures, including inflation and economic uncertainty [11]. - Despite challenges in North America, the company is expected to benefit from strong international growth, particularly in Mainland China, with international revenues projected to increase by 9.4% year-over-year [12][13]. Strategic Initiatives - The company is executing its Power of Three x2 growth plan, focusing on product innovation, guest experience, and market expansion to drive long-term growth [22][23]. - Initiatives such as community-based events and brand campaigns are crucial for increasing brand awareness and customer loyalty [12]. Stock Performance and Valuation - lululemon's shares have declined by 37.4% over the past three months, underperforming the industry and broader market indices [14]. - The stock currently trades at a forward 12-month P/E multiple of 13.55X, above the industry average of 11.39X, indicating strong investor expectations for future performance [19][20]. Long-term Outlook - Despite near-term pressures from inflation, tariffs, and softer discretionary spending, lululemon's long-term growth narrative remains compelling, supported by its strategic initiatives and international expansion [24][25].