Tariff Ruling Offers Margin Relief, But LULU's Turnaround Hinges on Core Operational Proof

What happened

A Seeking Alpha article highlights a potential upside for LULU from a SCOTUS ruling striking down IEEPA tariffs, which could reduce import duties and improve gross margins. However, the DeepValue master report rates LULU as 'WAIT,' with the stock pricing in a prolonged U.S. demand reset, tariff-driven margin pressure, and elevated inventory risk. Filings reveal Americas comparable sales declined 5% in Q3 FY2025, gross margin fell to 55.6% due to tariffs, markdowns, and affiliate programs, and inventory surpassed $2.1B. Management has quantified tariff headwinds at ~$210M for FY2025 and expects pressure to continue, indicating that while the ruling helps, it may not fully offset ongoing challenges like weak U.S. traffic and inventory bloat. Thus, the investment thesis remains focused on observable improvements in Americas comps, inventory discipline, and Spring 2026 product execution, rather than isolated tariff relief.

Implication

The tariff ruling provides a favorable external factor that could ease some margin pressure, but LULU's gross margin compression is also driven by markdowns and inventory clearance, which require internal execution to fix. International growth remains robust, offsetting U.S. weakness, but the core Americas segment needs a product-driven turnaround to stabilize comps and reduce reliance on promotions. Elevated inventory levels above $2.1B risk further markdowns if demand doesn't improve, pressuring earnings despite any tariff relief. Leadership transition and successful delivery of Spring 2026's '35% new style penetration' are critical catalysts that will determine if operational momentum returns. Therefore, while the news is positive, it doesn't alter the fundamental 'WAIT' recommendation, and investors should await evidence of comp stabilization and inventory control in the next 6-12 months.

Thesis delta

The SCOTUS ruling on tariffs introduces a potential margin tailwind that could support gross margin recovery toward the base case of 56–57%, slightly reducing one external headwind. However, the core thesis shift is minimal, as the investment call still hinges on LULU demonstrating improved Americas comps and inventory control, with the ruling merely easing cost pressure rather than solving execution challenges like product staleness or leadership uncertainty.