lululemon's Q2 Earnings Echo Tariff & Cost Headwinds: Buy Now or Sell?

lululemon athletica inc. LULU is likely to witness top-line growth when it reports second-quarter fiscal 2025 results on Sept. 4, after market close. The Zacks Consensus Estimate for fiscal second-quarter sales is pegged at $2.53 billion, indicating a 6.9% increase from the year-ago quarter's reported figure.The consensus estimate for the company's fiscal second-quarter earnings is pegged at $2.84 per share, suggesting a 9.8% decline from the year-ago quarter’s actual. Earnings estimates have moved down by a penny in the past seven days.The Vancouver-based company has been reporting steady earnings outcomes, as evident from its bottom-line surprise trends in the past several quarters. lululemon has a trailing four-quarter earnings surprise of 5%, on average. Given its positive record, the question is, can LULU maintain the momentum?Earnings WhispersOur proven model does not conclusively predict an earnings beat for LULU this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.lululemon has an Earnings ESP of -1.11% and a Zacks Rank #4 (Sell). You can see the complete list of today's Zacks #1 Rank stocks here.Key Insights on Trends to Define LULU’s Q2 Resultslululemon’s second-quarter fiscal 2025 results are expected to reflect continued headwinds from the ongoing uncertainty due to the impacts of increased tariffs on imports from China and Mexico, which are likely to have led to higher costs. lululemon also faces SG&A expense deleverage due to planned investments in strategies and initiatives to fuel long-term growth. These investments include digital marketing and seasonal store openings to drive guest acquisition, build brand awareness and expand testing for longer-term growth opportunities. On its last reported quarter’s earnings call, management warned about the rising import tariffs of 30% on goods from China and 10% from other countries, expecting these tariffs to significantly pressure the gross margin in the second half of the year. These headwinds are likely to have impacted LULU’s gross margin and profitability in the to-be-reported quarter.For the second quarter of fiscal 2025, lululemon expects the gross margin to decline 20 bps year over year, led by elevated occupancy and depreciation, higher tariff rates, slightly higher markdowns and adverse currency rates. Selling, general and administrative (SG&A) expenses, as a percentage of sales, are expected to deleverage 170-190 bps year over year, driven by higher foundational investments and associated depreciation, and strategic initiatives to enhance brand awareness and support growth. The operating margin for the fiscal second quarter is expected to decline 380 bps year over year, whereas it reported operating margin growth of 110 bps in the prior-year quarter. The variance is mainly due to the impacts of external factors like tariffs and currency headwinds. EPS for the fiscal second quarter is expected to be $2.85-$2.90, whereas it reported EPS of $3.15 in the prior-year quarter. lululemon athletica inc. Price and EPS Surprise  lululemon athletica inc. price-eps-surprise | lululemon athletica inc. QuoteOur model estimates a year-over-year gross margin contraction of 200 bps to 57.6% in the fiscal second quarter. We expect the SG&A expense rate to increase 190 bps to 38.7%, with the operating margin declining 380 bps to 19%.Additionally, lululemon’s fiscal second-quarter performance is expected to have been impacted by the decline in store traffic across the United States, owing to a cautious consumer mindset, driven by macroeconomic pressures such as inflation, tariffs and economic uncertainty. Despite strong engagement with new products, lululemon continues to face headwinds in driving consistent footfall and sales growth in its largest market, underscoring the need for stronger momentum and recovery in North America.However, LULU is poised to benefit from the strong business momentum in its international markets, including Mainland China and the Rest of the World, as the brand connects well with customers globally. The company has been on a growth trajectory with its Power of Three x2 growth plan, focusing on product innovation, guest experience and market expansion. Initiatives like community-based events and brand campaigns have been crucial for increasing brand awareness, attracting customers and strengthening brand loyalty. These efforts are expected to have aided the company's fiscal second-quarter performance.On the last reported quarter’s earnings call, management expressed confidence in the ongoing strength of its international business, particularly in Mainland China. Our model predicts international revenues to increase 9.4% year over year for second-quarter fiscal 2025.LULU’s Price Performance & Valuationlululemon’s shares have exhibited a downtrend in the past three months, losing 37.4% compared with the industry’s decline of 12.6%. Meanwhile, the company has underperformed the Zacks Consumer Discretionary sector and the S&P 500’s growth of 6.7% and 9.7%, respectively.lululemon’s 3-Month Performance Image Source: Zacks Investment Research The LULU stock has underperformed V.F. Corporation VFC, Ralph Lauren Corporation RL and Guess? Inc. GES, which have rallied 23.7%, 7.6% and 59.6%, respectively, in the past three months.At its current price of $202.20, the LULU stock trades 8.7% above its 52-week low of $185.95. Moreover, lululemon’s current stock price stands 52.2% below its 52-week high of $423.32.From the valuation standpoint, the company trades at a forward 12-month P/E multiple of 13.55X, exceeding the industry average of 11.39X. Image Source: Zacks Investment Research The premium valuation suggests that investors have strong expectations for lululemon’s future performance and growth potential. However, the stock currently seems somewhat overvalued. As a result, investors may be hesitant to buy at these elevated levels and prefer to wait for a more favorable entry point.Investment Thesislululemon is facing a challenging retail backdrop, with inflation, rising interest rates and softer discretionary spending weighing on consumer behavior. Luxury and premium categories, particularly in the Americas, are under pressure, while tariffs remain an additional headwind. These factors have created a difficult environment for growth, but the company continues to execute on its long-term vision.Momentum is being driven by its Power of Three ×2 strategy, which targets doubling of revenues by 2026 through three pillars: international expansion, growth in the men’s business, and enhanced digital engagement. This multi-pronged approach is helping lululemon balance near-term challenges with structural growth opportunities.International markets stand out as a key driver, with China playing a central role in lululemon’s plan to significantly scale global revenues. Alongside digital investments that deepen customer engagement and a growing men’s apparel segment, lululemon is positioning itself for resilience and long-term value creation.ConclusionNo matter how the stock responds to the upcoming second-quarter fiscal 2025 results, lululemon’s long-term growth narrative remains compelling, supported by product innovation, global expansion and the Power of Three ×2 strategy. However, near-term pressures, from inflation and higher interest rates to tariff uncertainty and softness in the women’s business in the Americas, may weigh on margins and dampen performance, warranting caution ahead of earnings.At its foundation, lululemon is a profitable, strategically disciplined brand with significant international potential. Still, with macro headwinds clouding near-term visibility and valuation leaving limited room for error, some investors may prefer to wait for greater clarity before adding exposure. For existing shareholders, patience may be rewarded over time, but for prospective buyers, exercising caution ahead of the earnings print could be the more prudent move.Zacks' Research Chief Names "Stock Most Likely to Double"Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.This top pick is a little-known satellite-based communications firm. Space is projected to become a trillion dollar industry, and this company's customer base is growing fast. Analysts have forecasted a major revenue breakout in 2025. Of course, all our elite picks aren't winners but this one could far surpass earlier Zacks' Stocks Set to Double like Hims & Hers Health, which shot up +209%.Free: See Our Top Stock And 4 Runners UpWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report V.F. Corporation (VFC): Free Stock Analysis Report Ralph Lauren Corporation (RL): Free Stock Analysis Report Guess?, Inc. (GES): Free Stock Analysis Report lululemon athletica inc. (LULU): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks