0001397187-26-000078
SEC filingInternational growth offset Americas decline, but tariff headwinds compressed margins, driving 38% net income drop.
In Q1 2026, Lululemon reported net revenue of $2.47 billion, a 4% increase from $2.37 billion in Q1 2025. Growth was led by international markets, with China Mainland up 30% and Rest of World up 13%, while the Americas declined 3%. Gross profit fell 3.2% to $1.34 billion, resulting in a gross margin of 54.2%, down 410 basis points from 58.3%. The margin compression was driven by a 270 bps product margin decline from higher tariffs, markdowns, and inventory provisions, plus 140 bps from increased occupancy, depreciation, and distribution costs. SG&A expenses rose 12.4% to $1.06 billion, or 42.9% of revenue (up 310 bps), due to higher employee costs, brand investments, technology spending, and $11.4 million in proxy contest costs. Operating income dropped 37% to $276.9 million, with operating margin shrinking 730 bps to 11.2%. Net income decreased 38% to $195.0 million, and diluted EPS fell to $1.69 from $2.60.
Management highlighted an action plan to drive sustainable Americas growth across product creation, activation, and enterprise enablement, with emphasis on full-price selling. Tariff uncertainty remains elevated: the IEEPA invalidation and new tariffs create refund potential ($230 million paid but not recognized as an asset), while macroeconomic headwinds (consumer sentiment, FX volatility) persist. No specific quantitative guidance was provided, but liquidity remains strong with $1.5 billion cash and $593.6 million undrawn credit facility, supporting capital expenditures for store openings and technology investments.
Note 10 provides supplementary balance sheet details. Inventory net of reserves stood at $1,687.1 million at May 3, 2026, down slightly from $1,700.8 million at February 1, 2026. Inventory provisions increased to $95.0 million from $88.8 million. The company maintains no outstanding borrowings under its $600 million revolving credit facility (Note 4), with only $6.4 million in letters of credit issued. This indicates ample liquidity, though cash and equivalents are not disclosed in the Notes.
No explicit purchase commitments or capacity agreements are disclosed in the Notes. The supply chain financing program (Note 5) had $39.9 million outstanding, classified as accounts payable, but this is a liability, not a commitment. The company is involved in litigation (Note 12) but has not recognized material provisions for those matters.
During Q1 2026, the company repurchased 2.2 million shares for $361.8 million, including commissions and excise taxes. As of May 3, 2026, $1.0 billion remained available under the $4.0 billion stock repurchase program. No dividends are paid. Capital expenditures are not detailed in the Notes (only in the cash flow statement, which is not part of this analysis).
Note 11 provides segment-level profitability for the first time this quarter (following a change in CODM). The three segments are Americas, China Mainland, and Rest of World. Americas generated $1,621.2 million in revenue and $408.5 million in operating income, while China Mainland contributed $478.4 million in revenue and $203.1 million in operating income, reflecting strong margin expansion. Rest of World (APAC and EMEA combined) had $372.0 million in revenue and $69.4 million in operating income. Corporate costs of $404.0 million bring total operating income to $276.9 million.
Operating cash flow (CFO) of $214M significantly improved from -$119M in the prior year quarter, driven by a $195M net income and positive working capital adjustments, particularly a $24M decrease in inventories versus a $174M increase last year. Capex of $127M was lower than the prior year's $152M, indicating reduced investment intensity. Free cash flow is not explicitly stated but CFO covers capex substantially. Share repurchases of $362M and net stock settlement taxes of $12M were funded by operating cash and existing cash reserves, resulting in a $292M net cash decrease. Working capital swings included a $69M prepaid tax outflow and $38M accounts payable decrease. Overall, cash generation quality improved, with operating cash flow covering both capex and a significant portion of capital returns.