lululemon athletica inc. (LULU Quick QuoteLULU - Free Report) tumbled 19.8% after the company reported its first-quarter fiscal 2025 earnings, despite beating both revenue and EPS estimates. The sharp sell-off reflects investor concern over the company's updated outlook, particularly its warning about rising import tariffs of 30% on goods from China and 10% from other countries, which are expected to significantly pressure gross margins in the second half of the year. As a result, lululemon revised its full-year gross margin outlook downward, sending a cautionary signal about profitability ahead.

The stock has plunged 12.8% in the past month, significantly underperforming the broader industry’s slight 7.2% decline and the Consumer Discretionary sector’s 3.8% gain.

LULU Stock's Price Performance

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Despite the better-than-expected earnings report, investors seem to be assessing the company’s prospects, considering the ongoing operational transitions.

More Insights Into LULU’s Performance & Outlook

Management now expects gross margins to decline 110 basis points year over year, nearly double the 60-bps drop forecasted earlier. These tariff-related pressures are compounded by a delay in cost mitigation efforts, which are not expected to have a material impact until the second half of fiscal 2025. As a result, second-quarter guidance includes a steep 380-bps drop in operating margin, sending a negative signal to the market about near-term profitability.

In addition to external cost pressures, SG&A expenses increased 11.9% year over year, outpacing revenue growth and resulting in margin deleverage. While lululemon continues to invest in global expansion, marketing and technology, these rising costs, combined with FX losses and strategic reinvestments, are expected to lead to a 50-bps SG&A deleverage for the full year. This suggests that the company's ability to tightly control costs in a more inflationary, complex global retail environment is under strain.

Another area of concern is moderating consumer demand in North America, particularly in the United States, where comparable sales declined. Store traffic in the United States declined compared to the fourth quarter, and while average transaction values rose, the overall volume of sales was dampened. This dynamic hints at softness in core and seasonal offerings, making the company more reliant on a few new product successes to drive growth.

Lastly, elevated inventory levels raised red flags. Inventory was up 17% year over year, while revenues increased just 7%. Although management attributes this to tariffs and FX, such inventory builds can lead to markdown pressure, especially if demand remains soft. While markdowns declined 10 bps in the first quarter, the company prudently built-in higher markdown expectations for the second half due to ongoing macro uncertainty. Despite strong brand momentum and international growth, the near-term profitability risks and cost inflation overshadowed lululemon’s otherwise solid first-quarter performance, triggering the sharp stock selloff.

Is LULU Well-Poised for the Long Term?

lululemon is well-positioned for long-term growth, supported by its strong global brand, innovation-led product strategy, and expanding international presence. The company continues to gain market share in the premium activewear segment, driven by consumer loyalty, differentiated technical products, and compelling brand activations. Its strategic expansion in key international markets like China and EMEA, where sales are growing at double-digit rates, opens up significant white space for future growth. With plans to open 40-45 net new stores in fiscal 2025, mostly internationally, lululemon is positioning itself as a truly global brand with diversified geographic revenue streams.

Despite near-term margin pressures from tariffs, foreign exchange headwinds and increased SG&A spending, lululemon benefits from a healthy balance sheet with $1.3 billion in cash and no debt. This gives it the financial flexibility to continue investing in innovation, digital capabilities, and supply chain improvements. The company’s long-term strategy, including its Power of Three x2 growth plan, remains intact and focused on driving sustained growth in men's, digital and international channels. While short-term earnings may fluctuate, lululemon’s fundamentals, brand strength and strategic clarity position it well for long-term value creation.

Final Words on LULU Stock

Reflecting the near-term headwinds and muted guidance, concerns about Lululemon’s short-term growth persist. Despite beating first-quarter fiscal 2025 revenue and earnings expectations, the company’s downward revision of gross margin forecasts, driven by higher import tariffs and delayed cost savings, has raised red flags about profitability in the second half of fiscal 2025.

While these pressures may weigh on performance in the coming quarters, lululemon’s long-term fundamentals—bolstered by international expansion, brand strength, and a debt-free balance sheet—remain intact, justifying a patient hold stance for investors. For now, investors may want to wait for signs of stabilization in earnings before considering a position in LULU. Currently, lululemon carries a Zacks Rank #3 (Hold).

Solid Picks in LULU’s Broader Industry

We have highlighted three better-ranked stocks from the same industry, namely Birkenstock Holding PLC (BIRK Quick QuoteBIRK - Free Report) , Urban Outfitters (URBN Quick QuoteURBN - Free Report) and adidas AG (ADDYY Quick QuoteADDYY - Free Report) .

Birkenstock manufactures and sells footwear products. BIRK flaunts a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Birkenstock’s current fiscal-year sales and earnings indicates growth of 21.6% and 36.7%, respectively, from the year-ago period’s reported figures. BIRK has a trailing four-quarter earnings surprise of 7.8%, on average.

Urban Outfitters is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor, and gift products. URBN sports a Zacks Rank #1 at present.

The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year sales and earnings indicates growth of 8% and 21.2%, respectively, from the year-ago period’s reported figures. URBN has a trailing four-quarter earnings surprise of 29%, on average.

adidas is a leading brand in the sporting goods market with strong positions in footwear, apparel and hardware. The company currently carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for adidas’ current fiscal-year sales and EPS indicates growth of 12.3% and 86.1%, respectively, from the year-ago period’s reported figures. ADDYY has a trailing four-quarter negative earnings surprise of 48%, on average.