After experiencing a significant drop in its second-quarter performance, Lululemon has begun scaling back its ambitious expansion strategy. The company faces weakening demand for its well-known leggings, as well as a decision to limit new store openings throughout the remainder of the year.
Sales Decline Prompts Strategy Shift
According to figures released Thursday, Lululemon saw a 20% tumble in its flagship leggings sales during the second quarter versus last year. This slump contributed to an overall net revenue slide of 4% to $2.4 billion, with revenue in the Americas plunging by 8%. The global comp store sales also dropped 9%, highlighted by a steep 12% decline in the Americas. As a result, expansion plans for physical stores have been curtailed, with only 35 net new stores planned for 2026 instead of the previously announced 40. Pop-up locations have also been scaled back to about 40, a sizable reduction compared to last year’s 65 locations.
While the company’s gross margin grew by 200 basis points to 60.5%, this was supported by a 560-basis point lift from $134.5 million in tariff refunds. Despite this, net income saw a decrease of more than 11%, ending at $329 million.
Leadership Change Amid Declining Performance
New leadership will soon be guiding Lululemon through these turbulent times. Heidi O’Neill, who comes from a lengthy career at Nike spanning nearly three decades, assumes the CEO role next week in place of interim co-CEOs such as Meghan Frank, the current CFO. Emarketer principal analyst Sky Canaves stated that O’Neill now faces more daunting circumstances than when she first agreed to take the job, substantially increasing the pressure on her tenure.
Looking to the third quarter, the outlook remains grim. Frank advised analysts that net revenue for Q3 is expected to decrease by 10% to 11%. She said that although some recent product releases and marketing efforts have received positive reactions, feedback for new launches has been inconsistent overall. Lululemon continues to be affected by challenging conditions in both the Americas and China, its two most important markets.
Forecasts Cut and Skepticism from Analysts
The company has adjusted its annual outlook downward again, predicting up to a 7% decline in net revenue, with projected totals between $10.35 billion and $10.5 billion. This update follows a reduction in guidance back in June, when forecasts shifted from an anticipated 2%-4% revenue increase to a possible decrease of 1%. The drop is particularly pronounced in the leggings segment, which, according to BNP Paribas analysts led by Laurent Vasilescu, makes up about a third of Lululemon’s revenue and enjoys its strongest margins. Vasilescu noted that the falloff may indicate consumers have started moving away from athleisure overall, raising concerns of “multi quarter and even multi year declines.”
Many analysts are skeptical about a prompt recovery. The incoming CEO’s tenure could create further near-term instability, with William Blair analysts pointing out that the management transition may complicate the company’s recovery efforts. Jefferies analysts, led by Randal Konik, have recommended that O’Neill not only pause expansion, but also fine-tune the product lineup, focus resources on the Americas, tackle inventory management, bolster key product categories, reduce costs, and address internal company culture. They emphasized O’Neill’s start comes at a challenging time, with weak store traffic, high expenses, and without any updated projections for 2027 expected before March.
New Leadership, Ongoing Uncertainty
The downsizing of both store and pop-up launch plans, along with declining sales in major product categories, sheds light on the substantial hurdles Lululemon faces. With Heidi O’Neill about to step in, the market will be watching closely to see how she navigates the brand through this period of uncertainty and whether she can reenergize growth as customers’ preferences continue to evolve.