LULU - Brand/product challenges persist; potential turnaround visibility continues to get murkier

Research evidence excerpt

LULU - Brand/product challenges persist; potential turnaround visibility continues to get murkier

Truist Securities

International momentum is more solid; reiterated FY26 outlook – On top of 28% CC growth in FY25, mgmt reiterated the FY26 outlook

for Mainland China which calls for revenues in grow ~20% YOY. In 1Q, sales in China grew 30% reported (23% CC) driven by +13% CC

comps, but mgmt noted that the shift of Chinese New Year into 1Q added 8pts to the overall growth rate. Mgmt highlighted that trends in

China were trending above their guidance prior to the disruption/ slowdown at the end of 1Q & into 2Q (driven by negative commentary

in the media and product launches underperforming). Further, 1Q revenues in the rest of world segment were up 13% reported (9% CC)

and the company reiterated its expectations for mid-teens% growth in FY26.

Markdowns remain a meaningful headwind to GMs in 2Q; guidance is conservative regarding tariffs – In the original FY26 outlook,

LULU expected markdowns to improve sequentially through the year (including ~flat YOY in 2Q). Markdowns represented a 40bps

headwind to GMs in 1Q (vs mgmt’s expectation for 30bps of pressure), but softer topline trends in 2Q are expected to drive incremental

seasonal promotions than previously anticipated. While the company still expects a sequential improvement in 2H, the 2Q guide calls for

50bps of markdown pressure (slightly above the 40bps in 1Q). Further, with regards to tariffs, the FY26 outlook notably (1) bakes in no

benefit from tariff refunds and (2) assumes 20% tariff rates in 2H. While this could lead to some upside if they receive refunds and/or rates

remain lower, we note that the removal of the de minimis exemption (which was not impacted by the Supreme Court) likely remains a