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The momentum from a strong holiday shopping season carried into January for lululemon athletica (LULU), enabling the activewear company to cruise past the upwardly revised EPS and revenue guidance it provided on January 13. However, when the calendar flipped to February, sales began to cool as customers reined in spending amid waning consumer confidence levels. Uncertainties around tariff policies are adding to an already difficult and complex environment for retailers, leading LULU to issue cautious guidance for Q1 and FY26 that fell short of expectations.

• The intensifying macro headwinds come as LULU is attempting to turn its U.S. business around after some merchandising missteps led to a disappointing 2024. LULU created a new reporting structure within its product team, enabling faster decision making within its merchandising teams, and refreshed product lines that were lacking new colors, prints, and patterns. Positive signs emerged last quarter when U.S. revenue was flat qtr/qtr, indicating a stabilization in demand, but the souring macro climate has prevented LULU from building off that recovery.
• In Q4, revenue increased by only 1% in the U.S. due to slower traffic. Adding to the disappointment, LULU said it's only anticipating modest U.S. revenue growth in 2025, even as it ramps up new products and brand activations. The company stated that it's seeing a strong response to new products, so its outlook would likely be even softer without the contributions from the launches. Looking ahead, LULU will build upon the newness and innovations this year with the introduction of BeCalm yoga wear, Glow Up technical franchise, and Mile Maker men's running franchise, among others.
• Staying true to recent form, the international business continued to shine in Q4 as comparable sales soared by 22% in constant currency. LULU has rapidly expanded its presence in China, where comps jumped by 27% in constant currency, indicating that brand awareness and popularity is still on the rise there. Unlike the Americas region, where LULU utilizes a more traditional marketing model, the strategy in China is more localized. The company looks to foster a strong relationship with a community through in-store experiences, local events, and wellness initiatives.
• Despite operating in a highly promotional retail environment, LULU has protected its brand, refraining from increasing markdown activity in order to drive sales. Accordingly, gross margin increased by 100 bps yr/yr to 60.4%, driven by lower markdowns, improved shrink, and lower product costs.

Strong holiday sales, robust international growth, and improved product margins allowed LULU to exceed Q4 expectations, but U.S. sales are showing signs of sluggishness again amid escalating macro headwinds, including tariffs. The company plans to combat these challenges by enhancing product innovation and newness, strengthening its market positioning, but it faces an uphill climb given the increasing consumer hesitancy.