Lululemon's 10-Q: China Booms as Americas Slowdown Squeezes Margins

Lululemon is a dominant force in the high-end athletic apparel market, but even premium brands face economic headwinds. The company's latest quarterly report reveals a business navigating a complex landscape, where robust international expansion is offset by a slowdown in its home market and a notable squeeze on profitability. Let's dig into the numbers from its recent 10-Q filing to understand the key trends shaping the company.

Contrasting Fortunes Across the Globe

The most striking trend in Lululemon's third-quarter results for fiscal 2025 is the sharp divergence in its geographic performance.

• The Americas: The company's largest and most established market showed signs of strain. Net revenue declined by 2% to $1.73 billion compared to the same quarter last year. More significantly, comparable sales—a key retail metric that tracks performance in stores and online channels open for at least a year—fell by 5%.

• China Mainland: In stark contrast, the China Mainland segment is a powerful growth engine. Revenue surged by an impressive 46% to $465 million. On a constant dollar basis, which strips out the effects of currency fluctuations, growth was even stronger at 47%.

This performance gap extends directly to profitability. Income from operations in the Americas fell by 21%, while in China Mainland, it jumped by a remarkable 56%. This underscores the company's growing reliance on international expansion, particularly in Asia, to drive growth as its core North American market matures.

The Margin Squeeze

While total revenue grew by a healthy 7% to $2.6 billion, the bottom line tells a more challenging story. Net income fell by nearly 13% to $307 million, down from $352 million in the prior year. The primary reason for this is shrinking profitability.

The following flow diagram provides a visual breakdown of Lululemon's quarterly revenue and expenses.

Gross margin, which is the percentage of revenue remaining after accounting for the cost of goods sold, dropped significantly by 290 basis points (or 2.9 percentage points) to 55.6%. The company attributes this decline primarily to the impact of higher tariffs and increased markdowns. Concurrently, Selling, General, and Administrative (SG&A) expenses grew faster than revenue, increasing as a percentage of sales from 38.0% to 38.5%. The combination of lower gross margin and higher operating costs pushed the company's operating margin down from 20.5% to 17.0%.

A Change at the Top

Perhaps the most forward-looking piece of news was not in the financial tables but in the "Subsequent Events" section of the filing. It discloses that CEO Calvin McDonald will step down, effective January 31, 2026. A leadership transition is a pivotal moment for any company, and for Lululemon, it arrives as the need to navigate market challenges and define the next phase of growth becomes increasingly critical.

In conclusion, Lululemon is performing a delicate balancing act. Its powerful brand and exceptional growth in China provide a strong tailwind. However, the slowdown in the Americas and persistent margin pressures from tariffs and competition present significant challenges. The upcoming leadership change adds another layer of uncertainty, making the next few quarters crucial for shaping the company's future trajectory in the fiercely competitive activewear market.