Lululemon's core business contracted in Q1 2026, compounded by a sharp decline in profit margins, leading to a comprehensive downward adjustment of full-year guidance.

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Beijing time, June 5th, lululemon officially released its financial report for the first quarter of fiscal year 2026.

Data shows that the company achieved net revenue of $2.47 billion in the first quarter, up 4% year-on-year, or 2% on a constant currency basis, slightly exceeding Wall Street's previous expectations of $2.43 billion. However, on the profit front, the company's net profit for the quarter sharply dropped to $195 million, with diluted earnings per share of $1.69, far below last year's $2.60 in the same period.

This report clearly reveals that lululemon is suffering a "double blow" of core market slowdown and declining profitability. As a result, management has comprehensively lowered its revenue and profit forecasts for fiscal year 2026.

Breaking down the regional revenue, lululemon's core North American market is experiencing a substantial contraction.

In the first quarter, net income from the Americas, which accounts for the bulk of company revenue, fell 3% year-on-year, or 4% on a constant currency basis. More concerning is the same-store sales metric, reflecting real sales at stores. During the reporting period, same-store sales in the Americas dropped by as much as 5% year-on-year, or 6% on a constant currency basis.

This means that in its most mature market with the highest brand penetration, both foot traffic and conversion rates have encountered clear bottlenecks.

The international market has become the sole driver of lululemon's positive revenue growth.

In the first quarter, international net income grew 22% year-on-year, or 16% on a constant currency basis, while international same-store sales achieved growth of 13%.

Among these, the Mainland China market, as the absolute main force in the international business, performed particularly well. Data shows that revenue in Mainland China for the quarter surged 30% year-on-year, with same-store sales achieving stable growth of 13%.

Management further explained in the subsequent earnings call that about 8 percentage points of the strong growth in China came from consumer demand driven by the shifted dates of this year's Chinese Lunar New Year holiday.

In terms of channel and store expansion, lululemon had a net increase of 5 directly operated stores globally in the first quarter, bringing its total number of stores to 816 at the end of the period. However, the high growth rate in the international market and steady store expansion still cannot offset the gap caused by declining same-store sales in the Americas, resulting in overall revenue growth being maintained at a low rate of 4%.

Compared to the barely positive single-digit revenue growth, the deterioration in lululemon's profit statement is particularly striking.

First to be hit was gross profit. In the first quarter, gross profit dropped 3% year-on-year to $1.34 billion, while gross margin plummeted 410 basis points from 58.3% in the same period last year to 54.2%.

For lululemon, which has always relied on high premiums to support its brand positioning, the sharp decline in gross margin directly reflects that in the face of macro headwinds, its pricing power and cost control are being weakened.

Meanwhile, the company's operating costs were not effectively diluted. Sales, general, and administrative expenses reached $1.06 billion in the first quarter, or 42.9% of net revenue, up 310 basis points from 39.8% last year.

Gross margin contraction combined with rising expense ratios created a destructive de-leveraging effect. In the first quarter, lululemon's operating profit plummeted 37% year-on-year to $277 million, with operating margin halving from 18.5% last year to 11.2%, a decline of 730 basis points.

On the inventory front, the company achieved certain results.

As of the end of the first quarter, lululemon's total inventory was $1.7 billion, up 2% in USD terms, but down 4% in actual item count. Additionally, the company held $1.5 billion in cash and cash equivalents at period end and spent $358 million this quarter to repurchase 2.2 million shares, maintaining a healthy cash position.

However, weakening financials and uncertainty in the Americas market have made management take a cautious stance toward the future.

Interim Co-CEO and CFO Meghan Frank said in the financial report: "Recently, we've been facing headwinds, and therefore adjusted our full-year performance outlook. We've evaluated our business and are taking additional actions to reposition and further strengthen our product line wherever needed."

Based on this, lululemon has comprehensively and substantially lowered its guidance for fiscal year 2026:

Fiscal Q2 2026: Net revenue is expected to be in the range of $2.45 billion to $2.475 billion, a year-on-year decrease of 2% to 3%; diluted earnings per share are expected to be in the range of $1.76 to $1.81.

Fiscal year 2026 full year: Net revenue guidance is lowered to the range of $11 billion to $11.15 billion, turning from positive to negative growth (an expected year-on-year decrease of 0% to 1%); full-year diluted earnings per share guidance is also lowered to the range of $10.95 to $11.15.

Behind this unvarnished financial statement, lululemon is entering a tough adjustment period. International expansion temporarily cannot conceal the weakness of its American base, and the full-scale contraction in profitability metrics and the switch from growth to decline in performance guidance suggest this star company must find a new balance between scale and profit.

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