Lululemon Stock Sinks 20% After Second Guidance Cut in a Year, Leggings Sales Drop 20%

Lululemon investors got hit with a gut punch Thursday, September 3, and the stock is still bleeding Friday morning.

Shares fell as much as 20% in after-hours and premarket trading after the athletic-apparel company reported fiscal second-quarter results that missed Wall Street's already-lowered expectations, then cut its full-year outlook for the second time this year. The stock dropped below $100, a price last seen in 2018, according to finelo. It's now down roughly 80% from its record high at the end of 2023, per TradingKey.

The Numbers

Revenue fell 4% year-over-year to $2.416 billion, missing the $2.46 billion Wall Street expected, according to TradingKey. Comparable sales dropped 9% to 10% depending on the source, well below the 4.6% decline analysts had modeled. Net income fell to $329.2 million, or $2.92 per share, from $370.9 million, or $3.10 per share, a year earlier, according to CNBC.

The headline profit numbers were propped up by a one-time $134.5 million tariff refund under the International Emergency Economic Powers Act, which added 560 basis points to gross margin and 86 cents to earnings per share, according to BigGo Finance. Strip that windfall out and gross margin actually deteriorated by about 360 basis points. Operating margin fell 190 basis points to 18.8%.

The most alarming detail was in the product line that built the company. Leggings sales fell approximately 20% during the quarter, interim co-CEO Meghan Frank told analysts, according to BigGo Finance. Newer looser-fit styles like the Groove Wide-Leg pant and Align Foldover Jogger haven't come close to filling that hole.

Guidance Slashed Again

Lululemon now expects full-year revenue of $10.35 billion to $10.5 billion, a 5% to 7% decline, down sharply from its previous guidance of $11 billion to $11.15 billion issued just months ago. Full-year earnings guidance dropped to $9.48 to $9.73 per share, from a prior range of $10.95 to $11.15, and down from $13.26 per share in fiscal 2025, according to BigGo Finance. Third-quarter guidance calls for revenue to fall 10% to 11% and earnings of 93 cents to 98 cents per share.

Management also cut planned new store openings for the year from 40 to 35, according to TradingView.

China and the Drum Circle

Americas revenue fell 8%, with comparable sales down 12%. That's the company's largest market and it's shrinking. International revenue grew 4%, but that masked a 2% decline in constant currency, and China mainland specifically was the biggest shortfall driver, Frank told analysts, according to Fast Company.

The China slowdown is a sharp reversal. Just one quarter earlier, China revenue had jumped 30% year-over-year, or 23% in constant dollars, according to Fast Company. Now growth has collapsed to 4% reported, or a 2% decline adjusted for currency.

Fast Company reported that the timing lines up with a controversial May 30 yoga festival Lululemon hosted on the Great Wall of China, where a drum circle performance featuring Chinese actor Zhu Yilong drew a wave of negative social media reaction. On the earnings call, Frank herself attributed part of the quarter's weakness to "negative commentary" on social media affecting brand performance in both of its largest markets, and BigGo Finance reported management also pointed to a softer Tmall 618 shopping festival. Lululemon's own public comments described the pressure in general terms rather than naming the Great Wall event specifically, but the timeline Fast Company laid out and the size of the swing in China's numbers make the connection hard to ignore.

Wall Street Is Split

The reaction on Wall Street ranges from brutal to bullish. Jefferies analyst Randy Konik wrote there are "plenty more lemons to squeeze before this one turns," according to 24/7 Wall St. Truist analyst Joseph Civello downgraded the stock to Sell back in July, warning the company's problems could be "more structural," according to TradingView. Goldman Sachs analyst Brooke Roach cut her price target to $111 from $122 before the earnings release, citing weakening card spending, elevated promotions, and moderating China growth.

Morningstar senior equity analyst David Swartz told Yahoo Finance, as reported by TradingView, that Lululemon has "no real financial problems" and that "the problem is with the sales growth," pointing to intensifying competition from Alo Yoga, Vuori, and Skims eating into a category Lululemon once dominated with little pushback.

Michael Burry, the investor known for his short bet against subprime mortgages before the 2008 crash, took the opposite view in a Substack post Friday morning, calling Lululemon stock a "fat pitch" below $100 and saying he plans to buy more shares, according to 24/7 Wall St. Burry pointed to the company's $1.3 billion in cash and zero financial debt as downside protection, and estimated 15% to 20% annual returns over the next 15 to 20 years if the brand returns to growth. That's a long bet resting entirely on a turnaround nobody has proven yet.

A New CEO Walks Into the Mess

Heidi O'Neill, a longtime Nike executive with a background in product development and women's apparel, is scheduled to take over as Lululemon's chief executive on Tuesday, September 8, according to TradingView. She'll inherit a company that's financially stable but has lost its grip on a product category it invented, facing pressure from founder Chip Wilson and a stock price that's erased eight years of gains in a matter of quarters.

Whether O'Neill's product background can reverse a 20% leggings decline, or whether Lululemon's troubles are the structural brand erosion Bernstein analyst Aneesha Sherman has warned about, is a question no earnings call has answered yet. The next data points, comparable sales, full-price demand, and inventory levels, arrive with the third-quarter report.