Why Lululemon fell 17% on EPS 64% above guidance

In June, Lululemon told the market to expect $1.76 to $1.81 of diluted earnings per share in its second quarter. On 3 September it reported $2.92 — 64% above the midpoint of its own range.

The reconciliation between those two facts is printed in the release, as a footnote.

The $0.86

During the second quarter of 2026, the Company received International Emergency Economic Powers Act (“IEEPA”) tariff refunds of $134.5 million plus associated interest of $4.1 million. These amounts were recognized as a reduction of cost of goods sold and an increase to other income, respectively, and increased diluted earnings per share by $0.86.

$0.86 of the $2.92 was a refund of tariffs already paid. It arrives as a credit against cost of goods sold, which means it lands in gross profit and travels down every margin line below it.

Q2 2026     Q2 2025    change
Gross margin
as reported            60.5%       58.5%     +200bp
excluding refunds      54.9%       58.5%     -360bp
Operating margin
as reported            18.8%       20.7%     -190bp
excluding refunds      13.2%       20.7%     -750bp

The reported gross margin went up. The underlying one went down by nearly four points. The company says so itself — it prints the 560 basis point effect twice, once for each margin.

Revenue fell 4.3% to $2,415.6 million, which is 1.4% below the bottom of the $2.450bn to $2.475bn the company had guided to in June. Comparable sales fell 9%.

Three ways to count the EPS decline

Net income itself fell 11.2%, to $329.2 million. The after-tax value of the refunds is about $97.1 million of that figure.

The company repurchased 2.7 million shares for $330.0 million in the quarter, after 2.2 million for $358.3 million in the first.

The same forecast, in June and in September

4 June            3 Sept        change
Net revenue            $11.000-11.150bn  $10.350-10.500bn         -5.9%
Diluted EPS               $10.95-11.15       $9.48-9.73          -13.1%
same basis (less $0.86)  $10.95-11.15       $8.62-8.87         -20.9%

This is the sentence that does the work, from the June release: “The guidance does not reflect any potential IEEPA tariff refunds or future repurchases of the Company’s shares.” And from September: “The 2026 outlook includes $0.86 per share from tariff refunds and associated interest, net of tax recognized in the second quarter of 2026, but does not reflect any further potential tariff refunds.”

One number excludes the refunds and the other includes them. Compared as printed, the full-year earnings forecast came down 13.1%. Put on the same basis, it came down 20.9%.

Revenue guidance moved from a decline of 1% to 0% to a decline of 5% to 7%.

The third quarter has no refund in it

Guidance for the quarter now running is $0.93 to $0.98 a share. The same quarter last year produced $2.59. At the midpoint that is a fall of 63.1%, on revenue guided down 10% to 11%.

That is the first period the company has forecast without a refund inside it, and it is the number the market had in front of it on 4 September.

Where the revenue went

Americas revenue fell 8.0% and its comparable sales fell 12%. China Mainland grew 3.6% and Rest of World 4.7%. The company opened nine net new stores in the quarter, ending with 825.

Meanwhile selling, general and administrative expenses rose 5.7%, to $1,006.3 million, against revenue that fell 4.3%. That gap is most of the 750 basis points the underlying operating margin gave up.

The cash flow went the other way

2026        2025
Net income                    524,271     685,477
Depreciation and amortisation 277,667     234,244
Stock-based compensation       50,275      21,247
Inventories                   (14,350)   (237,903)
Operating cash flow           589,278     209,722
Purchase of property           277,056     330,161

Operating cash flow nearly tripled while operating income fell 24%. The reason is the inventory line: a year ago the first half absorbed $237.9 million into inventory, and this year it absorbed $14.4 million. Inventories ended the quarter down 1% in dollars and 7% in units.

A company that stops building inventory generates cash. Whether that is discipline or demand is not something this statement settles.

What this article does not settle

• No consensus comparison. Analyst estimates are not filings and we do not verify them. The “64% above guidance” here is against the company’s own published range, not against anyone’s estimate.
• The refunds are real money. $134.5 million arrived in cash and $4.1 million of interest with it. Nothing here says the figure is improper — the company disclosed it clearly and quantified its effect. What it is not is a repeatable margin.
• The ex-refund margins are our arithmetic. We subtract the $134.5 million credit from gross profit and from operating income. The company gives the 560 basis point effect but does not print restated margins.
• The same-basis guidance line is our arithmetic too. Subtracting $0.86 from the September midpoint assumes the June range would have been stated the same way had refunds been known, which is what the June sentence says but not a certainty.
• Comparable sales are company-defined. So are constant-dollar figures. Both are reconciled or described in the release.
• The exhibits are furnished, not filed. The 10-Q linked above is the filed document and carries the statements used here.

As reported, EPS fell 5.8%. Take out the $0.86 and it fell 33.5%. Take out the buybacks as well — the diluted share count fell 5.6%, to 112.9 million from 119.7 million — and it fell 37.4%.

Check it yourself

The tariff footnote is at the end of the bullet list on page one of the 3 September release, marked (1). The two guidance paragraphs are headed 2026 Outlook in each of the two releases linked above, three months apart, and the sentence about what the guidance does and does not reflect sits directly underneath in both. The segment figures are the first table of Note 11 in the 10-Q, and the cash flow figures are its consolidated statements of cash flows. Amounts in the 10-Q are in thousands.

For the same shape — a forecast cut that was larger than the headline implied — see how DICK’S cut sales guidance 0.9% and EPS guidance 17% and Tyson, whose 11% cut lands 43% on a single quarter. For another household name whose reported number and adjusted number told different stories, see why Campbell’s cut its dividend 36%. And for a company that beat on the headline while the cash went into inventory rather than out of it, see NetApp. And for the same refund landing at another retailer, where the raised full-year outlook moved by less than one quarter’s refund was worth, see American Eagle.

The calculations and their numeric inputs are displayed in the “Calculations and inputs” section below.

If a figure here does not match a filing, tell us and it will be corrected on the article and on the corrections log, with the date.