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In lululemon athletica's (LULU) own words, the company has not been maximizing its opportunities in the women's business in the U.S., and that poor execution caused it to fall short of Q2 sales and comparable sales expectations. The company, which has seen a reversal of fortunes this year after a banner year in 2023, also issued downside Q3 revenue guidance and lowered its FY25 EPS and revenue forecast. However, the market was already anticipating a rough earnings report, as reflected in the stock's 16% drop since LULU posted Q1 results on June 5, so the focus mostly turned to the company's plan to right the ship.

• The main issue plaguing LULU tracks back this spring when the company introduced a product assortment that lacked newness and was understocked in smaller sizes. In regard to the newness issue, CEO Calvin McDonald clarified during the earnings call that the problem isn't related to LULU's innovation pipeline. Rather, where LULU fell short was with its seasonal updates, which had too narrow of new choices for colors, prints, and silhouettes, especially in the bottoms product category.
• Making matters worse, LULU decided to pull its new "Breezethrough" leggings product off the shelves in late July after receiving a barrage of negative reviews. Although the move didn't impact its Q2 results, it represented another setback and misstep for a company that's trying to convince its shareholder base that its innovation engine is still alive and well.
• On that note, Mr. McDonald looked to reassure investors and analysts last night that a plan is in place to quickly fix this situation. Specifically, he stated that for 2025, LULU is fast-tracking new styles within the performance, shorts, tops, and track suits categories. Additionally, the company has improved its in-stock inventory of smaller sizes through Q2 and its entering Q3 in a better position. As such, LULU is confident that that it will begin to see these initiatives pay dividends over the upcoming quarters as it returns to its historical levels of newness by the spring of 2025.
• One area where LULU isn't currently struggling is in the international business. For the quarter, international revenue jumped by 31% in constant currency, led by a 37% increase in mainland China, driven by its omnichannel strategy. In the Rest of World market, revenue grew by 27% in constant currency with particular strength seen in both EMEA and APAC.
• In contrast, the Americas business struggled again as comparable sales decreased by 3% compared to a 22% increase for international. Overall, comparable sales increased by 2%, missing analysts' expectations by a fair amount.

The main takeaway is that some unforced errors are adding a layer of difficulty to an already challenging business backdrop, but the missteps in LULU's women's business were well known and baked into the stock ahead of the Q2 print. Therefore, the focus now centers on LULU's strategy and ability to resolve the newness issues that have set the company back. Based on LULU's impressive track record of success and brand strength, we believe that the company likely will bounce back sooner rather than later.