Lululemon Earnings: CEO Change Amid North America Sales and Margin Weakness

Key Morningstar Metrics for Lululemon Athletica

• Fair Value Estimate: $295.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Lululemon Athletica’s Earnings

Lululemon Athletica’s LULU third-quarter sales rose 7% as a 2% Americas decline was offset by 33% international growth. Due to higher tariffs, gross margin fell to 55.6% from 58.5% and operating margin fell to 17.0% from 20.5%. Separately, it was revealed that Calvin McDonald will step down as CEO at January’s end.

Why it matters: McDonald has achieved tremendous growth since joining Lululemon in 2018, but North America sales have weakened over the past couple of years amid merchandising mistakes and greater competition.

• Lululemon is conducting a search for a new leader. In the interim, current executives Meghan Frank and André Maestrini will serve as co-CEOs. Given Lululemon’s international and category expansion plans, we anticipate the firm will look for a CEO with experience in multinational apparel retail.
• As for the results, Lululemon’s 7% sales increase beat our 4% estimate on 46% growth in the China Mainland (18% of total), and the negative effect of tariffs and markdowns to clear slow-moving inventory on margins was less than expected. Thus, earnings per share of $2.59 beat our $2.23 forecast.

The bottom line: Lululemon’s shares leapt 10% in Dec. 11 post-market trading but they are still attractive relative to our $295 fair value estimate, which we do not expect to change much. Despite challenges, we think Lululemon’s brand, the source of our narrow moat rating, remains popular.

• The fourth quarter is likely to be difficult, given the need to clear merchandise ahead of 2026 product releases, unfavorable calendar shifts in China, and a roughly 400-basis-point negative effect on gross margin due to tariffs. Also, Lululemon reported some post-Thanksgiving sales slowness.
• Even so, Lululemon has a history of outperforming guidance, and it should be able to reduce the tariff impact over time. We anticipate a return to operating margins of 22%-23% from around 20% at present in about two years through its efficiency and product development efforts.