Story Stocks^®

Shares of lululemon athletica (LULU) were stretching higher in early action after the activewear company raised its Q4 revenue and EPS guidance following a stronger-than-expected holiday shopping season. In 2024, sluggish consumer spending trends, rising competition, and some product and merchandising missteps in the spring made for an especially challenging year, as illustrated by the stock's 25% dive lower. However, LULU's upside Q3 earnings report on December 5 indicated that a turnaround was underway, bolstered by ongoing strength in the international business, as well as some improvement in the struggling Americas business, which now has a new reporting structure within the product team.

• For Q4, LULU is now expecting revenue to grow by 11-12% to $3.56-$3.58 bln, up from its prior guidance of $3.475-$3.510 bln, and EPS of $5.81-$5.85, compared to its former outlook of $5.56-$5.64. When the company reported Q3 results in early December, there was a belief that its Q4 guidance -- which was merely in line with revenue and EPS estimates at the time -- was conservative after CEO Calvin McDonald stated during the earnings call that the holiday shopping season was off to a solid start. He added that traffic trends in both the e-Commerce and store channels were healthy over the Thanksgiving weekend.
• That positive sentiment has underpinned a 17% rally in the stock since the Q3 earnings report. If sales trends continue to improve for the Americas business, more gains could be in LULU's future. One year ago, the company botched its merchandising strategy, releasing a more limited range of colors, prints, and patterns for its spring product assortment. This gaffe amplified the macro-related headwinds that LULU was already contending with, resulting in Americas' comparable sales growth sinking to flat in 1Q25 and then to -2% in 2Q25.
• Last quarter, though, the initial signs of a turnaround surfaced as Americas' net revenue edged higher by 2% with the U.S. flat on a qtr/qtr basis, reflecting a stabilization in demand. Importantly, LULU didn't lean on markdowns and promotions to drive the improved demand, as indicated by the 40 bps increase in adjusted gross margin. On that note, LULU also bumped its Q4 gross margin guidance higher, forecasting an increase of 30 bps compared to its prior outlook for a decrease of 20-30 bps.
• Meanwhile, the international business is booming, led by China, where comps soared by 24% in constant currency in Q3. The company's direct sales approach, including hosting wellbeing events and activations, has worked wonders in China. 

The main takeaway is that LULU's turnaround efforts are gaining traction after a difficult year in which the company lost some ground to competitors such as Athleta, Alo, Fabletics, and others. While macroeconomic headwinds are persisting, the company's higher-income customer base should work in its favor as it improves its product assortment.