Lululemon Athletica Inc (NASDAQ:LULU) reported financial results for the second quarter after the market close on Thursday.
Below are the transcripts from the second quarter earnings call.
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OPERATOR
Thank you for standing by. This is the conference Operator. Welcome to the Lululemon Athletica Second Quarter 2025 Financial Results Conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts who wish to join the question queue may press Star then one on their telephone keypad. Should you need assistance during the conference call, you may reach an operator by pressing Star then zero. I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.
Howard Tubin (Vice President, Investor Relations)
Thank you and good afternoon. Welcome to Lululemon’s second quarter Earnings Conference Call. Joining me today to talk about our Results are Calvin McDonald, CEO and Meghan Frank, CFO. Before we get started, I’d like to take this opportunity to remind you that our remarks today will include forward looking statements reflecting management’s current forecast of certain aspects of Lululemon’s future. These statements are based on current information which we have assessed, but by which its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10K and our quarterly reports on Form 10Q. Any forward looking statements that we make on this call are based on assumptions as of today and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call we will present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our quarterly report on Form 10Q and in today’s earnings press release. In addition, the comparable sales metrics given on today’s call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10Q are available under the Investors section of our website at www.lululemon.com. before we begin the call, I’d like to remind our investors to visit our investor site where you will find a summary of our key financial and operating statistics for the quarter as well as our quarterly infographics. Today’s call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I would like to turn the call over to Calvin.
Calvin McDonald (CEO)
Thank you Howard and welcome to our Quarter two earnings call. As you’ve seen from our press release. While earnings per share this quarter exceeded our expectations, revenue fell short of our guidance and we are reducing our revenue and earnings expectations for the year. While we continue to see positive momentum overall in our international regions, we’re not happy with the current results in the US Business. Lululemon has been in a period of hyper growth for several years, more than tripling our revenue in just six years and we have successfully managed through a number of market shifts. We are facing yet another shift today within the industry related to tariffs and the cost of doing business. The increased rates and removal of the de minimis provision have played a large part in our guidance reduction for the as we navigate current market dynamics, I see an opportunity to reset some key areas of the business as we continue to drive long term growth during our time together. Today I will provide an update on our business and my perspective on the near term as we continue to plan and adapt for the future. Specifically, I will share my insights on the state of the US business, our assessment of our current product offering, what we’ve learned has worked and what has not worked, and the actions our teams are taking to reaccelerate growth in the US my perspective on our strength globally and the opportunities this continues to create for our brand going forward, and the impact of the new trade environment, implications of higher tariffs and the removal of the de minimis exemption on our revised guidance. Finally, we’ll conclude by taking your questions. So let’s begin as I speak to the U.S. i’d like to set some context for you. During the second half of last year, our teams were focused on bringing our newness penetration back to historical levels. We achieved this as we shared last quarter through a combination of new styles and an increase in seasonal color within our core styles. While the guest is responding well to many of our new styles, they are not reacting as we had anticipated to the updated seasonal colors we brought into our core assortment. Given this, we have recently conducted a deeper product diagnostic, the results of which I will share with you today. I now believe we have let our product lifecycles run too long within many of our core categories, particularly in lounge and social. We have become too predictable within our casual offerings and missed opportunities to create new trends. At the same time, we are seeing shifts within the industry. The overall market for premium athletic wear in the US remains challenging, with declines continuing in quarter two. Consumers are spending less on apparel overall, spending less in performance activewear, and are being more selective in their purchases, seeking out truly new styles. This makes it even more important that we meet and exceed the expectations of our guests. For further context, let me provide some additional details on what we are seeing is working well and what is not working well within our product assortment. Our brand building initiatives and several of our new product innovations are working. In addition, we continue to see growth in our performance apparel within our brand initiatives. Our brand health continues to be strong with growth in both total and retained guests and we continue to acquire new guests and retain existing guests across all age demographics. In addition, our membership program continues to build and now has approximately 30 million members within product. Our guests continue to respond well to many of the new styles and innovations we bring into the assortment including Align, no Line, day Drift and BCom. By leveraging our Science of Field Product Development platform. Our view is that these offerings demonstrate the impact of our approach to innovation and our ability to solve the unmet needs of our guests. We also continue to differentiate lululemon from our competition with our performance apparel and we’re seeing continued growth overall across our key activities Yoga, Run Train, Golf and Tennis. As you know, performance apparel is a key differentiator for us in the marketplace and an important launchpad for us to showcase innovation and importantly, we have continued to gain market share within performance apparel even as the sector has declined according to the latest Circana market share data for the US Activewear space. So we know that we have a very loyal guest who continues to trust and prioritize the brand for their high performance apparel needs and when we deliver new innovation across the assortment, they respond and are ready to purchase. However, on the other side of the equation, let me now turn to what we believe has not been working well. Based upon our recent diagnostic, our lounge and social product offerings have become stale and have not been resonating with guests. Specifically, we have seen a less enthusiastic response to some core franchises across lounge and social such as Scuba, Softstream and Dance Studio, and we feel that our opportunity remains in frequency and conversion which is impacting their total spend the day. Data related to engagement and loyalty of our guests remains strong. My view now is that we have relied on the same product playbook across certain categories for too long. The competitive landscape is different today than it was even two or three years ago, and while no single competitor is having a meaningful impact on our business, there are now many players in the market. This makes it imperative that we are consistently better and stronger than ever and create the right balance of our core product and new styles across our merchandise mix. Let me zoom out and speak to what we now see as the root causes of our current product challenges in the U.S. the primary cause is that we relied too heavily on some of our core franchises across lounge and social for too long. We did not have the appropriate balance between existing and new styles across our casual offerings and and the guests stop responding as they had in the past. I would also mention as a secondary cause that in the current environment we have the opportunity to create more agility within our go to market process to allow us to go faster, to test new styles and to react to guest demand. We introduced several great new styles this spring, but couldn’t chase into the demand quick enough and left some of our guests disappointed. Our teams are now focused on increasing the number and frequency of new styles we bring into the assortment and rebalancing our go forward merchandise mix. I will now share details about the actions underway to elevate our product assortment and to improve how our teams continue to work to support our growing business. My view is that it’s now time to reset many of our practices related to how we develop and create the range of products that that will fuel the next phase of our growth. We have seen that when we get our product right, everything else can follow. Lululemon is a beloved brand with deeply loyal guests who have come to expect unparalleled product from us in terms of design, fabrication, innovation and newness. And I’m excited by the work of our Global Creative Director Jonathan Chung who joined us early last year. In this time he has built a strong team of lead designers for men and women who are infusing new energy into the Lululemon product playbook. This is an essential investment in our future both in terms of time and talent. Some areas of focus for our new design team include maintaining our momentum in performance activities, designing into several new products across lounge and social media, and giving a fresh perspective to some of our most iconic items. As a result of their work, we intend to increase new styles as a percentage of our overall assortment from the current 23% to approximately 35% next spring. We will continue to gauge guest behavior and adjust this penetration in future seasons based upon their response. We are also enhancing our capabilities to go faster within our go to market process by working with our vendors. We have and will continue to improve our ability to chase into strong performing styles outside of our mainline product development process. We have also improved our fast track design capabilities which reduces lead times by several months for select styles. These have been fully incorporated into the upcoming seasons to give us added flexibility to anticipate, meet and potentially exceed guest response and demand and through these actions we expect to create the anticipated improvements in our product portfolio and business performance with the most meaningful impact beginning in 2026. I would also like to speak to the recent announcement that Ranjou Das has joined Lululemon as our new Chief AI and Technology Officer. This is a new role at Lululemon and represents an elevated mandate to enable AI and technology to help expedite our product innovation process, improve our agility and speed to market, and increase personalization across our guest experience. I’m excited Raju has joined us and I look forward to partnering with him as he and our technology teams implement and accelerate these strategies. These plans create a clear path forward and are intended to create a better balance across our product assortment reaccelerate our business in the United States and we feel these will also benefit each market where we operate. Our teams have been working with the right sense of urgency and focus and I’m excited about the enhancements we’re making to some of our existing capabilities and the new ones we are developing to set up our next phase of growth. I want to also touch on our international business where our momentum remains strong overall and where our market expansion efforts continue at a steady pace. In China, our second largest market, total revenue increased 25% or 24% in constant currency. We opened five new stores in China mainland this quarter and we continue to drive brand awareness through a variety of activations and experiences including our 5th annual highly visible Summer Swipe Games. In our rest of world segment, total revenue increased 19% and 15% on a constant currency basis. We continue to open new markets as part of our growth plans, including our new company operated store in Italy in Milan, as well as franchise locations in Turkey and Belgium and looking ahead, we announced the selection of our franchise partner for India with the goal of opening our first Lululemon store in this market in the second half of 2026. We remain in the early stages of international growth and are seeing success across all our markets. The opportunity to drive unaided awareness, gain market share and grow our guest base is significant and while our growth rates remain strong, I expect the changes I just detailed for you in the US will benefit our business across all these important markets as well. Before I turn it over to Megan, I’d like to speak more about the macro environment and specifically the reality of the new tariffs and the removal of the de minimis provision. Companies across our industry are looking at various levers to navigate this period, including opportunities across their supply chains, expense management and strategic pricing actions. We are doing the same, however, realizing additional benefits will take time and given our financial strength and profitability, I am determined that we will not make any near term decisions that could hurt or damage our brand positioning over the long term. For the year we now expect revenue growth of 4 to 6% excluding the 53rd week in 2024 and earnings per share to be in the range of $12.77 to $12.97. These reductions relative to our prior expectations are being driven predominantly by North America. In the US we now expect a 1 to 2% decline in revenue and in China we anticipate growth in the 20 to 25% range. We continue to expect rest of world will grow approximately 20%. When looking at China quarter two revenue came in at the low end of our expectations. As we’re beginning to see some signs of macro driven headwinds in tier 1 cities, we’ve adjusted our guidance for the year to factor in this continued performance. Looking out to 2026 A, I believe the product plans discussed today will benefit our business in China as well, given the importance of lounge and social products in this market. Megan will share more with you on our revised guidance in just a few minutes. In summary, I see this period as an opportunity for Lululemon. We have a brand people love with extremely loyal guests who respond well to our new styles and innovation and we are clear on the path forward to meet and potentially exceed the expectations of our guests. I believe we will leverage our financial strength and once again demonstrate our agility to navigate this period while we steadily make progress on the product opportunities discussed today. We have learned a lot as a leadership team this year and we are a stronger organization as a result. I expect to see the most impact of our learnings and insights into 2026 and beyond. With that, I will now hand it over to Meghan.
Meghan Frank (CFO)
Thanks Calvin. While Q2 earnings per share exceeded guidance, …