It's been a rough Friday for Lululemon Athletica Inc. (LULU) shareholders. The yoga pants giant reported its second-quarter results, and the market didn't like what it saw. Shares tanked almost 17% in early trading, landing at $100.34.
The problem? Sales came in below expectations, and the U.S. market continues to be a sore spot. North America sales dropped 8.5% year-over-year, and the U.S. has now declined for five consecutive quarters. That's not the kind of streak any retailer wants to see.
Guggenheim Securities analyst Simeon Siegel is staying on the sidelines, reaffirming a Neutral rating on the stock. His take? The company's guidance might be too optimistic in some areas, and not pessimistic enough in others.
Here's the interesting part: Lululemon's gross margin actually improved by about 200 basis points to 60.5%. But that number comes with a big asterisk. It includes a tariff refund benefit of around 560 basis points. Strip that out, and the picture gets uglier. Sales and gross margin contraction of 355 basis points (excluding tariff refunds) were the worst in the industry, according to Siegel.
So what's really going on? Siegel argues that Lululemon's U.S. brand is "meaningfully overstretched," well above his estimated $3 billion to $4 billion industry-wide domestic brand saturation level. In plain English: the brand might have grown too big, too fast in the U.S., and now it's paying the price.
Management guided third-quarter sales significantly below Street expectations, which sounds cautious. But Siegel thinks that caution doesn't go far enough. The sales guidance "doesn't internalize a deep enough cut looking further out," he wrote, sparking concerns that this latest outlook is just one of a "thousand cuts."
Let's break down the numbers. Third-quarter earnings guidance reflects a 60% year-over-year decline. Full-year guidance, excluding tariff refunds, shows earnings declining by around 35%. While the Q3 guidance might be conservative, Siegel sees downside risk to Q4 earnings.
It's not all doom and gloom, though. Siegel acknowledges that Lululemon is a strong brand with a loyal customer base and is among the largest revenue-generating brands in history. But he believes it's "simply too large and still likely both over-selling and over-earning." In other words, the company might need to reset further before it finds its footing.
For investors, the key takeaway is that Lululemon's struggles in the U.S. aren't a temporary blip. They're a sign of a brand that may have saturated its core market. The question now is how deep the reset will go, and whether the company can find growth elsewhere to offset the domestic slowdown.
As of Friday's publication, LULU shares were down 17.60% to $100.34. It's a stark reminder that even the most beloved brands can stumble when they stretch too far.
