Lululemon, What an Abysmal Call
An open report card for Lululemon's management on their Q2 2025 earnings call.
LULU, baby, what are you doing?
This is your moment to reconnect with the customer, and you’re f**king it up.
One of the first things Calvin says when he hops on the call:
We are facing yet another shift today within the industry. Related to tariffs and the cost of doing business. The increased rates and removal of de minimis provision have played a large part in our guidance reduction for the year.
You’re kidding, right? The issue isn’t tariffs; it’s you. You not owning up to your failure to connect with your most loyal customers. Fit, young adults.
Allow me to demonstrate.
The assortments you brought in specifically to fix weaker Americas sales didn’t work. And yet, they’re the same price. Your same store sales in the Americas declined… There wasn’t an impact from tariffs; you failed to connect with your customers. Have you considered that perhaps it’s not tariffs? Maybe, just maybe, you;re alienating your core customer. Here’s a hint:
Since we’re on the topic of failures, let’s discuss your recent announcement installing a Chief of AI. It’s so disconnected from the customer, I have a hard time expressing it any other way than by being blunt. Your target audience is the young adult with a healthy lifestyle. It started with Yoga… and now you want it to be Yogai? Seriously. Just reconnect with young adults. Because, what they certainly don’t want is their yoga pants to have AI.
What confused me even more on the earnings call is the contradictory statements about their assortment. Calvin claimed guests are responding well to the new styles, but they are not “reacting as anticipated to the updated seasonal colors we brought into our core assortment”. What’s concerning to me is if Calvin is right in his assessment. It hints at a deeper issue. If guests like the styles, and still won’t buy, there’s real brand deterioration. Do you think if apple introduced new iPhone colors and “guests responded well”, that they wouldn’t buy the phones? Of course not, it’s Apple.
Brad Freeman made some good comments about this on X.
But it’s ok, Calvin has conducted a “deeper product diagnostic”:
Product lifecycles run too long particularly in lounge and social.
Lululemon has become too predictable within their casual offers and missed opportunities to create trends.
Shifts within industry where consumers spend less on premium activewear.
It’s giving me flashbacks to last year - their assortment fix in 2024 was supposed to introduce the “newness” that customers - excuse me, “guests” - desire. Looks like that didn’t work. Round 2.
I don’t think we need to discuss Alo and Vuori being real competitive threats. Everyone knows this. At this point it’s priced into the multiple. Broadly we expect the market should grow organically enough, especially internationally, for all three to do well.
One bright spot, as Matt McClintock points out on X is that “they gained share in performance apparel using Circana data.” We’ll give them the benefit of the doubt.
After a lot of talking about the loyalty of their customers, Calvin finally gets to what he believes is the root cause of Lululemon’s product challenges in the US. That is, they’ve relied too heavily on the core franchises across lounge and social for too long. The way the team at Lululemon is addressing these issues is focusing on number and frequency of new styles brought into the assortment and rebalancing their go-forward merchandise mix.
Calvin thinks it’s time to reset how they develop their product. He expects that if Lululemon focuses on the product, everything else will follow. They plan to continue to increase newness and move faster with vendors.
~ The Silver Lining ~
Lululemon is an empire. It’s growing at phenomenal rates in the international market, but it’s stumbling in the Americas. We believe this is largely self inflicted. For too long, they’ve turned their back toward their core “loyal” customer. Now is the time to reconnect with the customer at the brand level. It’s not about product newness, it’s about the brand resonating with young adults. American Eagle understands this.
On valuation, we think Mr. Market is in panic mode. LULU 0.00%↑ is down around 19% pre-market on September 5th, 2025, trading at $166.11. If the company produces $12.77 EPS for FY 2025 (low end of revised guidance), it now trades at a 13 PE. If we apply the roughly 13% decline in EPS to FCF, at the current price of $166.11, it’s a FCF yield of 6.77% - not bad. With an updated ROIC of 36%, we find that attractive.
Management isn’t great. We don’t think Lululemon fits a Chuck Akre three-legged stool framework. But it’s still an incredible brand. There’s value here, and Mr. Market is in panic mode.
~ A Last Message ~
Dear Management,
Reconnect with your core customer - who you think is so loyal. All they want is believe in the brand, and you’re turning your back on them. Calvin, you think everything “follows” the product, but it’s the customers who matter - they’re the ones who decide on the product. Listen to them. Reconnect with them. Don’t lock yourself in a room working on lounge and social wear.
All the best,
Refcell Capital
Disclosure: Not financial advice. Do your own research.