Lululemon's Minor Q4 Guidance Lift Fails to Address Core Profitability and U.S. Demand Woes

What happened

Lululemon announced that its Q4 FY2025 revenue and earnings per share are expected at the high end of prior ranges, a slight positive revision ahead of the ICR Conference. This update comes after a year of significant challenges, with Americas comparable sales declining 5% in Q3, gross margin compressed to 55.6% due to tariffs, and leadership in transition amid activist involvement. However, the company explicitly left guidance for gross margin and expenses unchanged, signaling that underlying structural issues—such as tariff drag and persistent U.S. demand weakness—remain unmitigated and could worsen in 2026. The DeepValue report emphasizes that Lululemon's investment case depends on stabilizing Americas comps and rebounding margins, neither of which this news substantively impacts. Thus, while near-term execution appears marginally better, the core turnaround needed in merchandising and cost structure is still pending, leaving the stock's recovery uncertain.

Implication

The slight upward revision to Q4 expectations suggests minimal near-term operational slippage, but it does not alter the bearish trajectory of Americas comps or gross margin pressure from tariffs. Without progress on these fronts, earnings power remains structurally impaired, reinforcing the report's 'WAIT' rating for clearer stabilization signs. Short-term, the stock might see a sentiment bounce, but sustained appreciation requires tangible fixes to U.S. merchandising and a credible tariff mitigation plan. Investors should monitor upcoming earnings for inventory trends and margin guidance, as further deterioration could validate the bear case. Consequently, maintaining a cautious stance and waiting for either proof of fundamental improvement or a cheaper entry near $180 offers better risk-reward.

Thesis delta

This minor guidance update does not shift the investment thesis; Lululemon remains in a 'WAIT' mode pending evidence that Americas comps are trending toward flat and gross margin is recovering above 56%. It highlights that international growth may support top-line, but the key valuation drivers—U.S. demand and profitability—are still deteriorating, with no change to margin or expense guidance. Therefore, the thesis to await stabilization or a deeper discount remains unchanged, as this news lacks material impact on the core risks identified in the report.