The Canadian athleisure giant has lowered its FY25 guidance after continued weakness in its core US market. With China and international sales still growing, CEO Calvin McDonald has announced plans to retire in early 2026.
Lululemon Athletica grew its international business once again in the third quarter of fiscal year 2025 but underperformed expectations, particularly in North America. The Canadian athleisure specialist ascribes this to generally weaker demand, sluggish US business, high inventory levels and continuing tariffs as the reasons. Accordingly, the company has significantly lowered its full-year guidance. The surprising departure of CEO Calvin McDonald comes during this phase of strategic challenges – and was accompanied by mixed results in the third quarter.
Profits shrink despite increase in sales
Group sales rose 7.1 percent to $2.57 billion in Q3 FY25 compared with the previous year, driven primarily by strong international business. On a comparable basis, however, sales in North America continued to decline. The gross margin shrank by 290 basis points to 55.6 percent (YoY). Operating profit fell by 11.2 percent to $435.9 million, while net profit fell by 12.8 percent to $306.8 million. Diluted earnings per share were $2.59, compared with $2.87 in the same quarter of the previous year.
McDonald leaves behind mixed legacy
McDonald’s retirement, on Jan. 31, 2026, will come at a delicate time – and has drawn a mixed reaction from the markets. Reuters links the change in leadership to an after-hours share price increase of around 10 percent and points to investors’ relief in light of stagnating US sales. Barron’s, on the other hand, emphasizes that McDonald has more than doubled sales since 2018 and significantly strengthened Lululemon’s international position. Critical voices such as Stocktwits point to deep-seated problems: market share losses, product weaknesses in the domestic market and increasing pressure from competitors such as Alo Yoga and Vuori. Nevertheless, his departure seems like a turning point: the good news for investors is that much of the strategy for 2026 is already in place. The question remains: who will now bring the necessary focus to get the US business back on track?
North America remains a weak spot
The new CEO will have big tasks ahead of him: The North American market continued to perform disappointingly in Q3. According to analyst reports, comparable sales in North America had already fallen by 4 percent in Q2 FY25, with total sales at $1.8 billion. The downward trend continued in the following quarter: sales declined to $1.76 billion, with comparable sales falling by a further 3 percent. Although North America continues to generate the lion’s share of business – around 68.5 percent of consolidated sales – growth remains elusive.
McDonald, who is still CEO, attributed the US performance to “lower store traffic in the Americas, partially reflective of economic uncertainty, inflationary pressures, lower consumer confidence, and changes in discretionary spending.” As he admitted in the earnings call, “We are disappointed with our performance in the US and the execution of some product initiatives. We are taking action to improve our execution in merchandising, pricing, and in-store presentation.” To counteract this, Lululemon now wants to work on its product range, pricing and presentation. Selected stores – in Los Angeles and Miami, for example – have already been remodeled on a trial basis to highlight new products more clearly. According to the company, the initial results have been positive.
China remains a bright spot
While business in North America is weakening, China remains a bright spot in Lululemon’s international business. In Q2 FY25, sales in mainland China rose by 22 percent to $368.1 million, and management is also reporting double-digit growth in Q3. This is attributed, among other things, to strong demand for new products, such as Featherweight Outerwear, Wunder Puff and updated Scuba variants. In the earnings call, management emphasized that the outerwear segment in particular was a growth driver. The response to new silhouettes and materials had been “very good.” Particularly noteworthy: Lululemon is scoring points in China with low discount rates and clear premium positioning. The response is also growing steadily in Tier 2 and Tier 3 cities. China is one of the key growth drivers in the international segment, which now accounts for over 25 percent of total sales – and is thus becoming increasingly important.
Strategic inventory build-up – or warning sign?
On the other hand, the development of inventories and margins is less encouraging. Inventories rose further compared with the previous quarter: by 38.5 percent to $1.997 billion. For market observers, this is a clear sign of sales problems – but the company itself sees it as a targeted preparation for upcoming new products. CFO Meghan Frank speaks of “strategic stockpiling.”
At the same time, import tariffs on Chinese goods are continuing to have a noticeable impact on profitability: Lululemon expects a negative effect of around $210 million for the year as a whole. Countermeasures include supplier negotiations, more efficient logistics and selective price adjustments.
Strategic initiatives ahead of McDonald’s departure
Management continues to focus on new product lines to revitalize the business: Extensive innovations in core categories such as leggings, tops and men’s bottoms are planned for 2026. According to the company, lifestyle formats such as Daydrift and new scuba silhouettes have also already met with a positive response.
In the earnings call, McDonald also announced plans to revamp existing core franchises. Among other things, new materials, modernized cuts and gender-specific additions are planned. One example: the popular ABC pants, previously a men’s-only model, will be available for women in the future. The goal is to clearly shift the ratio of new products to established lines: “There is enthusiasm for the newness that’s coming and shifting that mix to 35 percent.” McDonald also sees further potential in the men’s segment – among other things, through new fabric developments and innovations in bottom products. According to him, many of these products are already establishing themselves as “future core items” in the US market.
McDonald, who will continue to lead the company until the end of January 2026 and then remain in an advisory role until March, will accompany this strategic realignment, at least in the planning phase. However, the operational implementation of the 2026 line will then take place under new leadership.
Lululemon cuts full-year guidance again
In light of the challenges, Lululemon has once again lowered its forecast for the full fiscal year 2025. Revenue is now expected to be between $9.56 billion and $9.58 billion (previously: $9.90bn to $9.99bn), with EPS between $12.00 and $12.10 (previously: $12.62 to $12.72). For the final quarter, the company expects revenues of $3.17 to $3.19 billion and earnings per share of $4.95 to $5.00.
Despite the subdued expectations, Lululemon emphasizes its solid balance sheet: over $1 billion in cash, no long-term liabilities and a growing store network, with 784 stores worldwide. According to CFO Frank, the focus remains on long-term growth in Asia and the digital busines.
