Vancouver-based lululemon athletica is facing a sharp deterioration in its Canadian business, with revenue falling 11% in the second quarter as weaker traffic and inconsistent product performance weighed on sales across North America.
The athletic apparel retailer reported second-quarter net revenue of approximately US$2.4 billion, down 4% from a year earlier, while comparable sales declined 10% on a constant-currency basis. North American revenue fell 8%, with Canada underperforming the region as revenue declined 11% on a reported basis and 9% after adjusting for currency movements. U.S. revenue was down 8%.
The outlook suggests conditions will weaken further. Lululemon expects North American revenue to decline in the mid-teens during the third quarter, with Canada expected to perform below that level, while company-wide revenue is forecast to fall between 10% and 11%.
The results mark a significant reversal for a retailer that was still growing its Canadian business several years ago. Canadian revenue increased by nearly 10% in fiscal 2024 before growth slowed to less than 1% in fiscal 2025. Revenue then declined approximately 3% on a reported basis in the first quarter of fiscal 2026 before the drop accelerated to 11% in the second quarter.
The weakening performance in lululemon’s home market comes as the company confronts broader challenges involving store traffic, product relevance and changing consumer preferences. Management acknowledged during its earnings call that efforts to improve the business have not generated the response it had anticipated heading into the second half of the year.
“We expected a better response than we are seeing as we enter the second half of the year,” interim co-CEO and CFO Meghan Frank told analysts.
Sales Weaken Across North America
Lululemon’s second-quarter performance reflected pressure across several parts of the business. Total net revenue declined 4% to approximately US$2.4 billion, while North American revenue fell 8%.
China Mainland revenue increased 4% on a reported basis but declined 2% in constant currency. Revenue across the company’s remaining international markets increased 5%, or 6% in constant currency.
Store-channel sales declined 6%, while digital revenue was also down 6% and contributed approximately US$900 million, or 39% of total revenue. Performance weakened across major merchandise categories as women’s revenue declined 4%, men’s revenue decreased approximately 1%, and accessories and other revenue fell 13%.
Lululemon ended the quarter with 825 company-operated stores globally, up from 784 a year earlier. The company opened nine net new stores during the quarter.
The company’s reported profitability was helped substantially by refunds of tariffs previously paid under the U.S. International Emergency Economic Powers Act. Lululemon recognized US$134.5 million in tariff refunds during the quarter, along with associated interest.
Net income was approximately US$329 million and diluted earnings were $2.92 per share, compared with $3.10 a year earlier. The tariff refunds and associated interest contributed approximately $0.86 per diluted share, while the refunds added 560 basis points to operating margin.
Operating income was approximately US$454 million, while operating margin declined to 18.8% from 20.7% a year earlier. Gross margin increased 200 basis points to 60.5%, reflecting the substantial benefit from the tariff refunds. Excluding that benefit, product margin faced pressure from higher tariffs and markdowns, partially offset by higher pricing and lower product costs.
Traffic and Product Challenges Weigh on Sales
Management identified weakening traffic as the biggest contributor to current sales pressure, with conversion rates also running below year-ago levels. The weakness has affected both physical stores and digital channels.
Frank told analysts that lululemon has experienced pressure on brand sentiment and is increasing marketing investment as it works to drive customer acquisition and traffic. The company is also contending with an inconsistent response to new merchandise.
Lululemon entered the year with an action plan focused on product creation, product activation and enterprise improvements. Management saw some encouraging signs during the first quarter, but the response to product launches became less consistent as the company moved through Q2.
Consumer research conducted by lululemon has found that shoppers are looking for new and differentiated products and greater innovation from the brand. The company has been shortening parts of its product-development process while increasing its ability to respond quickly when new merchandise performs well.
Lululemon is chasing approximately 20% more product volume than last year, allowing it to reorder stronger-performing merchandise more aggressively while managing future inventory commitments. The strategy is intended to help the retailer react faster to changing demand and reduce exposure to products that are not resonating with customers.
Women’s Legging Sales Fall Approximately 20%
One of the clearest examples of the changing product environment is occurring in the category most closely associated with lululemon. Women’s legging sales declined approximately 20% during the second quarter, a larger drop than management had anticipated.
The company said shoppers have been shifting toward looser, “away-from-body” silhouettes, while demand for leggings has softened. Several newer styles are performing well, including the Groove Wide-Leg, Align Foldover Jogger, Breezily and an updated Dance Studio Pant, but those gains have not yet been enough to offset the decline in leggings.
Overall bottoms sales declined in the mid-single digits during the quarter, indicating that stronger demand for newer silhouettes is offsetting some of the weakness in traditional leggings. Lululemon said leggings remain an important part of its business, particularly for activities including yoga and Pilates, and maintains that it remains a market leader in the category.
Elsewhere in the assortment, management pointed to strength in the Define and Scuba franchises. Men’s Metal Vent Tech shirts and golf tops also performed well, with the golf assortment supporting demand for ABC bottoms.
Accessories remain under pressure, with revenue in the category declining 13%. Stronger backpack sales were not enough to offset weakness in bags.
Lululemon Increases Marketing as Brand Engagement Remains Strong
Lululemon plans to increase marketing investment during the second half of the year, with spending directed toward social and creator content, community events and other brand-building initiatives. The strategy comes as management works to turn consumer engagement with lululemon into stronger traffic and sales.
That was particularly evident this summer in Vancouver, where lululemon revived its SeaWheeze Half Marathon and Festival for the first time since 2019. Nearly 10,000 runners from 24 countries participated in the half marathon, while approximately 14,000 people attended the accompanying festival. A virtual SeaWheeze challenge on Strava attracted more than 85,000 participants from 120 countries.
Lululemon has already decided to bring SeaWheeze back next summer. Management said community events and recent campaigns have generated encouraging engagement but have not yet produced an improvement in the company’s top-line trajectory.
The company is planning additional activations during the fall marathon season, including in Toronto, New York and Chicago, as it looks to rebuild traffic and strengthen product consideration.
Canadian Sales Expected to Weaken Further
The company’s third-quarter forecast indicates that the slowdown is expected to become more pronounced. Lululemon expects revenue of between US$2.29 billion and US$2.32 billion for the quarter, representing a decline of approximately 10% to 11%.
North American revenue is expected to decline in the mid-teens, with Canada performing below the regional rate. China Mainland and the company’s other international markets are each expected to generate reported revenue growth of between 3% and 5%.
Profitability is also expected to fall considerably. Lululemon forecasts a third-quarter operating margin of approximately 6.5%, compared with 17% during the same period last year, while diluted earnings are expected to range from $0.93 to $0.98 per share, down from $2.59.
Slower sales will require additional seasonal clearance, according to the company, with markdowns expected to increase by approximately 60 basis points during the quarter.
For fiscal 2026, lululemon now expects revenue of between US$10.35 billion and US$10.5 billion, representing a decline of approximately 5% to 7% from fiscal 2025. North American revenue is forecast to decline in the low double digits, with Canada expected to perform slightly below the regional rate.
China Mainland revenue is expected to increase in the high single digits, while the rest of the international business is expected to grow in the mid-single digits. Full-year diluted earnings are forecast at between $9.48 and $9.73 per share, compared with $13.26 in fiscal 2025.
The forecast includes the $0.86-per-share benefit from tariff refunds and associated interest recognized during the second quarter and assumes no additional tariff recoveries. Operating margin is expected to decline approximately 530 basis points for the year, including the benefit from the tariff refunds.
Store Expansion Slows as Costs Come Under Review
Lululemon is becoming more selective about physical expansion as sales weaken. The retailer now expects to open approximately 35 net new company-operated stores globally during fiscal 2026, down from its previous guidance of approximately 40, while its number of pop-up stores is expected to fall from 65 at the end of last year to approximately 40 by the end of 2026.
Management said it is scrutinizing every new-store opening and optimization project. Approximately 10 of this year’s net new stores will be in North America, including seven in Mexico.
Management said roughly half of the North American openings involve converting pop-ups that have already demonstrated strong productivity. The remainder involve strategic locations or additional stores in existing markets where the company sees an opportunity for further penetration.
Lululemon’s Canadian store base has remained relatively stable in recent years. The company had 71 company-operated stores in Canada at the end of fiscal 2024 and fiscal 2025, with the count increasing to 72 as of May 3, 2026.
The company is also examining expenses across the organization, including supply chain operations, procurement, travel, professional fees, store labour hours and the pace of headcount growth. Frank told analysts that lululemon is taking a deeper look at its cost structure given current sales trends, while protecting investment in product and marketing.
New CEO Heidi O’Neill Arrives at a Critical Point
The weaker outlook comes days before Heidi O’Neill takes over as lululemon’s new Chief Executive Officer. O’Neill is scheduled to begin September 8 following a 27-year career at Nike, where she held senior roles spanning consumer strategy, product, brand, apparel and marketplace development.
Her arrival comes as lululemon deals with declining North American sales, a rapidly weakening Canadian business and changing preferences within women’s apparel. Management said O’Neill will conduct a deep review of the business, its strategy and the action plan currently underway.
In the meantime, lululemon is increasing investment in product and marketing while reducing expenses elsewhere and becoming more selective about store expansion. The company’s experience in Canada illustrates the challenge ahead: lululemon continues to draw substantial participation around community initiatives such as SeaWheeze in Vancouver, but that engagement has yet to translate into stronger sales.
With management forecasting an even steeper Canadian decline in the third quarter, reversing the deterioration in traffic and improving the response to its product assortment will be among the immediate challenges facing the company’s new leadership.
