Lululemon tumbles as slowing demand, tariff costs prompt annual profit cut

ChatGPT: Sportswear chain Lululemon Athletica Inc (LULU.O), opens new tab slashed its annual profit forecast on Thursday for a second time this year after missing estimates for second-quarter earnings, as shoppers cut back on discretionary spending and as tariff costs bit into margins.

The company's shares tumbled nearly 11% in extended trading.

The retailer, which sells its signature leggings for upwards of $120, and other athletic wear, is facing softening demand even after trying to woo customers with discounts, as a high interest rate environment pinches budgets and consumers become more cautious about spending on premium sportswear.

"We did see guest behavior become incrementally more cautious in the most recent quarter, and that was reflected in underlying traffic trends and also our guest shopping patterns," CEO Calvin McDonald said on a post-earnings call.

Lower sales volumes in North America alongside increasing markdowns helped drive gross margins down 130 basis points to 58.8% in the second quarter.

The company also expects full-year tariff costs to rise from an earlier expectation of $35 million to between $50 million and $55 million, largely due to tariffs on goods sourced from China

Average inventories decreased 9% to $1.6 billion in the second quarter, compared with the previous year period. On a unit basis, inventories were down about 6%.

"We now have a more cautious outlook for the balance of the year, and although we continue to see product resonating well with our guests, we are seeing a more cautious consumer," McDonald said.

The company now expects annual revenue in the range of $9.58 billion to $9.63 billion, compared with $9.84 billion to $9.94 billion estimated previously.

For fiscal 2024, it sees adjusted profit per share in a $12.40 to $12.60 range, below the $13.00 to $13.30 forecast previously and its earlier target of about $13.25 to $13.50 per share.

Its third-quarter revenue forecast of $2.34 billion to $2.365 billion also came in below analysts' $2.39 billion estimates.

Lululemon's second-quarter revenue of $2.36 billion beat Wall Street estimates of $2.35 billion, but adjusted profit of $3.15 per share in the quarter ended July 28 fell below analysts' estimates of $3.23, according to LSEG.