Net Profit Declines 13% - How Much Longer Can Lululemon Rely on China Amid Internal and External Challenges?

On March 17, lululemon delivered its Q4 and full-year 2025 earnings, marking a year of chaos and upheaval. The Q4 financial report beat lowered market expectations, with net revenue growing 1% to $3.6 billion, falling short of investor expectations. However, the growth rate of net revenue slowed significantly to its lowest in nearly three years. For comparison, Q4 net revenue growth was 13% in 2024, 16% in 2023, and 30% in 2022.

The full-year results are also concerning. Although lululemon’s global net revenue for 2025 surpassed $10 billion for the first time, reaching $11.1 billion, the 5% growth rate hit a new low since the company’s IPO, with North American markets even stagnating. Under the pressure of tariffs, uncertain leadership of the CEO, and ongoing stagnation in North America, lululemon’s net profit attributable to the parent declined 12.97% to $1.579 billion in 2025.

Fortunately, the Chinese market became the only lifeline, achieving high growth against the trend and supporting global expansion. In Q4 2025, mainland China revenue increased 24% year-over-year, and for the full fiscal year, China’s net revenue grew 29%. By the end of fiscal 2025, lululemon operated over 170 directly operated stores in mainland China.

While new products are just beginning to emerge and expansion continues, short-term transformation pains are unavoidable. The high-end athletic apparel giant faces “double pressure” from emerging brands in the same sector and traditional sports giants crossing over into its territory, along with internal conflicts and external challenges.

Meghan Frank, interim co-CEO and CFO, stated during the earnings call that the company will continue to implement its strategic plan, with a focus on increasing full-price sales in fiscal 2026, especially in North America.

Internal and external pressures, profit declines

lululemon’s performance is affected by multiple internal and external factors.

As a high-end athletic apparel brand known for minimal promotions and premium pricing, the company previously had to break its traditional positioning and adopt discount strategies to boost sales and clear inventory. This approach positively impacted inventory structure. Frank mentioned during the call, “We are satisfied with our inventory levels and structure at the end of Q4. We had expected high single-digit inventory growth, but actual growth was only 6%, which is healthier than expected. For the full year 2026, we expect inventory to remain flat or slightly decrease.”

In 2026, the company plans to reduce discounts and return to a full-price sales model. While this strategic shift aims to rebuild brand value, it will likely impact revenue growth in the short term. Coupled with weak performance in its core North American market—where same-store sales have stagnated for nearly two years and are projected to decline 1-3% in 2026—this adds further pressure on performance.

Beyond strategic adjustments, ongoing tariffs and rising operating costs further squeeze profits. lululemon expects tariffs to increase gross costs to $380 million in 2026, up sharply from $275 million in the previous year. After mitigation measures, net impact is $220 million, higher than $213 million in 2025. The removal of duty-free policies also adds to costs. Given the brand’s premium pricing position, slowing growth in the athleisure market, and intensified industry competition, the company cannot simply offset costs through price hikes. It plans only modest price increases on some products with no further hikes planned. Additionally, increased marketing spend and rising labor costs further compress profit margins.

Frank revealed, “In Q4 2025, gross profit was $2 billion, accounting for 54.9% of net revenue, down from 60.4% in the same period last year. Overall gross margin declined 560 basis points, mainly due to tariffs and higher markdowns.”

Adding to the woes, internal turmoil triggered by founder and largest shareholder Chip Wilson’s proxy fight has intensified pressure. Wilson publicly criticized the board for deviating from the brand’s creative core and lacking independent leadership, pushing for a board reshuffle. This conflict has incurred high costs, led to management changes, and distracted from core business operations. Market concerns over internal discord have also affected brand reputation and investor confidence, indirectly impacting performance.

Ahead of the earnings release, lululemon made a compromise by appointing Levi Strauss & Co. CEO Chip Bergh to the board. Long-time director David Mussafer will not seek re-election, temporarily easing some tensions. However, the negative impact of leadership instability remains, and investors are awaiting a new CEO to revitalize the brand.

Amid these uncertainties, lululemon’s guidance for 2026 is weaker than expected. The company projects Q1 revenue of $2.4–$2.43 billion, up about 1–3%. Full-year revenue is expected between $11.35–$11.5 billion, an increase of approximately 2–4%, significantly below historical growth rates. EPS for 2026 is forecasted at $12.10–$12.30.

North America stalls, China surges

Founded in 1998 by Chip Wilson in Vancouver, Canada, lululemon is a high-end athletic apparel brand that started with yoga wear. Headquartered in Vancouver, British Columbia, North America has long been a key growth driver. André Maestrini, interim co-CEO, president, and chief commercial officer, stated, “We remain the leading brand for women’s activewear in the U.S. In 2025, new customer acquisition, retention, engagement, and core brand relevance will remain solid.”

However, the financial results show a more serious decline in North America. In Q4 2025, U.S. revenue fell 4%, and comparable sales in the Americas declined 1%. For the full year, U.S. revenue decreased 1%, with comparable sales down 3%.

The once-strong “yoga pants = lululemon” moat is being eroded by both new and old competitors. Alo has turned yoga pants into a fashion statement through celebrity streetwear, with a 63% overlap in customer base. Vuori, initially targeting men’s yoga wear, has effectively entered the men’s segment lululemon is actively cultivating, dubbed the “male version of lululemon.”

Meanwhile, as lululemon shifts from “yoga pants” to a “sports lifestyle” brand, it must compete in the arenas of Nike, Adidas, and other traditional giants, facing their encirclement.

The company’s financial report emphasizes that returning to full-price sales in North America is a top priority, with key measures including increasing product innovation, reducing markdowns, streamlining SKUs, and optimizing inventory. Meghan Frank predicts that in 2026, North American revenue will decline 1–3%, with the U.S. market in the same range. “Q1 full-price sales have improved compared to Q4 2025, and Q2 is expected to be flat, with positive growth in the second half of the year.”

Zhou Ting, director of the Keke Research Institute, commented that in North America, led by the U.S., performance can only further decline amid market saturation and increasing brand polarization.

Amid a generally weak global market, China has become the brightest spot in lululemon’s financials, taking on the role of global growth engine. In Q4 2025, mainland China revenue grew 24% YoY, and for the full year, it increased 29%. Even on a high base, China outperformed all regions, offsetting North America’s sluggishness. Management explicitly stated that in 2026, China’s revenue is expected to grow about 20%, with Q1 potentially achieving explosive growth of 25–30%, far exceeding the company’s global guidance of 2–4%.

Behind this rapid growth are localized operations and channel expansion. André Maestrini said during the earnings call, “In mainland China, our product mix received positive feedback in Q4, especially the Wunder Puff™ jackets. During Chinese New Year, we released the new Spring Festival themed short film ‘Spring, Repeated as New’ and launched a limited edition for 2026. This reflects our ongoing efforts to engage with local consumers around key cultural moments and build connections.” This localized consumer engagement strategy continues to resonate well, further consolidating market share.

China not only maintains steady growth but is also set to be the main driver of new store openings in 2026. Meghan Frank stated, “In fiscal 2026, the company plans to open 40–45 directly operated stores globally and optimize about 35 existing stores, aiming for low double-digit growth in total retail space. New stores will include about 15 in North America, with around 8 in Mexico, and 25–30 internationally, most of which will be in China.”

Besides mainland China, markets like Europe and South Korea also show steady growth, with Q4 2025 revenue up 12% YoY and mid-double-digit growth expected in 2026, potentially becoming the second growth pillar after China. lululemon is further strengthening its high-end position in these key activewear markets.

However, behind these impressive figures lie risks. Zhou Ting pointed out that despite growth, the overall trend is downward. “Even in China, high growth comes at the cost of brand homogenization,” which could severely shorten lululemon’s brand lifecycle.

More critically, lululemon faces the common trap of increasing revenue without increasing profit margins, indicating a shift into “relative low-price competition” as brand strength stalls. Rising raw material and customer acquisition costs, declining store efficiency, and lower conversion rates are intensifying internal pressures. Without a move toward high-end branding, profit margins could further decline. Zhou Ting expressed concern that if the brand does not undergo a high-end repositioning, profitability will continue to suffer.

To break the growth dilemma, lululemon is launching a comprehensive transformation: stopping excessive discounts and gradually returning to full-price sales to restore brand premium and margins; accelerating product innovation, aiming to increase new product penetration from 23% in 2025 to 35% in 2026, with new colors and entirely new products not previously available to consumers. Future products will feature less logo, more coordinated colors, and streamlined accessories to enhance brand recognition.

According to the call, new collections designed by Chief Creative Officer Jonathan Cheung will debut in the first quarter. Frank mentioned, “We’ve seen some positive signs from Q1 products, and we’re excited about the growth potential of this line.” Additionally, lululemon is leveraging automation and AI to shorten product development cycles from 18–24 months to 12–14 months, improving the replenishment of bestsellers.

Whether this product, supply chain, and brand repositioning can help lululemon emerge from the trough remains to be seen.