lululemon's Cost Controls Face Uphill Battle Against Tariff-Driven Margin Erosion

What happened

Lululemon is grappling with significant margin compression, as detailed in the DeepValue report, driven by a ~$210M tariff headwind in 2025 projected to rise to ~$320M in 2026, alongside negative U.S. comparable sales. A recent Zacks article highlights that LULU is tightening costs through supply-chain redesign, selective pricing, and expense discipline to offset these pressures. However, the DeepValue report indicates such measures are part of a broader 'enterprise efficiency' initiative but may not fully counteract the structural tariff drag and promotional intensity in the U.S. market. Despite international growth, especially in China, supporting revenue, the core Americas segment remains weak, with gross margin falling 290 bps in Q3 FY25 to 55.6%. Consequently, the investment thesis remains in a 'WAIT' stance, pending clearer evidence from the Spring 2026 product reset and March 2026 guidance on U.S. demand and margin stabilization.

Implication

The cost controls emphasized in the news are already factored into the base scenario of the DeepValue report, which assumes gross margin stabilizes near 55-56%. Without successful execution of the Spring 2026 product refresh to revive U.S. demand, these efficiencies may only delay further compression. The bear scenario of sustained negative comps and higher tariffs could drive the stock towards $150, highlighting downside risk. Investors should monitor the Q4 FY25 earnings in March for guidance on FY26 margins and U.S. performance. A shift to a 'BUY' rating would require evidence of U.S. comps turning positive and margin recovery, which is not yet evident.

Thesis delta

The new article reinforces the existing thesis that lululemon is actively managing cost pressures but does not alter the core investment call. It underscores the importance of execution on efficiency initiatives, yet the fundamental challenges—U.S. weakness and tariff impacts—remain unaddressed without proven demand inflection. Therefore, no material shift in the thesis; the 'WAIT' rating stands until more concrete data emerges.