Tariffs Are a Big Problem for Lululemon Stock

Core Viewpoint - Lululemon is facing significant challenges due to rising costs from U.S. tariff policies, which are negatively impacting its financial outlook and competitive position in the market [1][2][6]. Financial Performance - In Q2, Lululemon's revenue grew by 7% year over year, primarily driven by new store openings and international market success, while comparable sales in the Americas decreased by 4% [4]. - The company's gross margin fell by 1.1 percentage points to 58.5%, and earnings per share (EPS) experienced a slight decline [4]. Outlook and Guidance - Lululemon has revised its 2025 revenue growth outlook to 2% to 4%, down from a previous estimate of 5% to 7%, with EPS now expected to be between $12.77 and $12.97, compared to earlier guidance of $14.58 to $14.78 [5]. - The company anticipates that tariffs and the removal of the de minimis exception will reduce its gross profit by approximately $240 million for the full year [8]. Tariff Impact - Most of Lululemon's products are sourced from countries with tariff rates exceeding the previous 10% baseline, with products from Vietnam now facing a 20% tariff [6]. - The removal of the de minimis exception is expected to significantly increase order fulfillment costs, as many e-commerce orders previously qualified for this exemption [7]. Market Position and Valuation - Lululemon's stock has declined 56% year to date, with a current valuation of just over $20 billion, making it less than twice the company's outlook for full-year sales [10]. - The stock is considered to be at its lowest valuation since the financial crisis over 15 years ago, presenting a potential opportunity for patient investors [10]. Future Prospects - Despite current pressures, Lululemon's strong brand and plans to refresh its product lines could lead to improved growth in the future [11]. - The ongoing impact of tariffs and economic conditions will pose challenges, but there may be investment opportunities at the current low stock price for those willing to wait [11].