It was 2006, and London was doing what London does best. The sky was gray. The air was damp. The kind of weather that makes a trench coat feel less like fashion and more like common sense.
Angela Ahrendts had recently taken over as CEO of Burberry. Her top 60 executives had flown in from around the world for her first strategic planning meeting in London.
As they arrived, Ahrendts noticed something strange. Not one of them was wearing a Burberry trench coat.
The observation captured something much larger that was happening inside the company. Burberry was still famous, but the brand had become stretched. Its check was everywhere, its products ranged from trench coats to dog leashes, and 23 different licensees were selling under the Burberry name.
Luxury was booming. Burberry was growing only about 2%. The brand still had recognition and premium prices.
What it was starting to lose was desirability.
Ahrendts’s turnaround would eventually bring the company back to an unexpectedly simple question: what makes Burberry worth paying more for? Her answer started with the trench coat.
Twenty years later, Lululemon may be facing a different version of the same problem.
Three measures of wanting, all falling at once
Lululemon is still a powerful brand. Its stores are everywhere, its logo is instantly recognizable, and customers still pay more than $100 for many of its core products.
But in the quarter ended August 2, comparable sales fell 9%. In the Americas, its largest market, they fell 12%.
The shape of the decline matters more than its size. Here is how the company describes what happened in the Americas:
“We experienced reduced traffic and lower conversion rates, as well as a decrease in average order value.”
Fewer people came. Fewer of those who came bought anything. Those who bought spent less. Three separate measures of wanting something, all moving the same way in the same quarter.
This does not look primarily like an inventory-glut problem. Units were down 7% while sales fell 9%, so the company is selling through a shrinking stock rather than clearing a warehouse. Assortment and range decisions could still be part of the story.
The decline also concentrates where a desirability problem surfaces first. On the earnings call, management said leggings sales declined approximately 20% in the quarter.
Leggings are the product that built the company, the thing Lululemon was bought for before it became a brand people wore to lunch. When the founding franchise falls a fifth in a quarter, the question stops being about the quarter.
One more line in the filing is worth sitting with. Globally, comparable sales fell on lower conversion and reduced store traffic, “partially offset by higher e-commerce traffic.”
More people are looking. Fewer are buying.
Customers still show up. They just stop concluding that they have to own it.
Why desirability is a financial variable
For a premium brand, desirability sits at the beginning of the economic model, rather than at the end of it.
Desirability creates demand. Demand gives a brand pricing power. Pricing power lets it sell at full price, take fewer markdowns, and earn a higher margin.
When desirability weakens, the chain runs backwards, and it does so quietly at first, because a strong brand can hold its prices long after customers have begun to hesitate.
Lululemon’s own filing shows the chain running backwards in two places.
The first is markdowns. Inside the gross-margin bridge sits a 150 basis point decline driven by higher tariffs “as well as markdowns including credit card affiliate programs.”
The second is more telling. The company’s recovery plan for the Americas “includes a plan to increase the reliance of full price selling to drive sustainable revenue growth.”
You do not plan to increase your reliance on full-price selling unless it has been slipping.
A one-time tariff refund is holding the margin up
Reported gross margin in the quarter rose 200 basis points, to 60.5%. On its own, that reads like a company defending its economics well.
The 10-Q gives the bridge, and one line does all the work: an increase of 560 basis points related to IEEPA tariff refunds, a one-time $134.5 million recovery of tariffs previously paid.
Strip it out and gross margin fell roughly 360 basis points.
The same refund added $0.86 to diluted earnings per share of $2.92. Operating margin, which no refund could rescue, fell 190 basis points.
So Lululemon is losing demand and losing its economics at the same time, with a customs refund sitting on top of the quarter and making the second half of that sentence hard to see.
Lululemon is renting its growth
Lululemon ended the quarter with 825 stores, up from 811 in February. Over the past year it has opened 16 net new stores in the Americas, 15 in China Mainland, and 10 across the rest of the world. Management guided to approximately 35 more this year, trimmed from approximately 40, with square footage growing about 10%.
Ten percent more selling space, guided in the same hour as a 10% to 11% revenue decline for the coming quarter.
| Change, Q2 2025 to Q2 2026 | |
|---|---|
| Gross square footage | +10.5% |
| Comparable sales | -9% |
The company is building selling space at roughly the rate its existing selling space is losing productivity.
This is why the international line looks better than it is. International revenue rose 4% while international comparable sales fell 3%, and 6% in constant dollars. In China Mainland, revenue rose 4% while comparable sales fell 2%, and in constant currency revenue itself fell 2%. The growth is new stores. The demand underneath them is going the other way.
The company quantifies the effect. In the Americas, the revenue decline was “partially offset by a $29.5 million increase from new or expanded company-operated stores and our other channels, including from sales to wholesale accounts and outlets.” Across the business, company-operated store revenue fell 6.5% and e-commerce fell 5.9%, while other channels, a mixed group covering wholesale, outlets, license and temporary locations, rose 10.9%.
The stores also cost something to run. Of the 230 basis points of gross margin lost to higher cost of sales, the largest piece reads:
“an increase in occupancy and depreciation costs of 180 basis points, driven by new and expanded company-operated stores, as well as increased penetration in China Mainland and Rest of World.”
Opening stores into softening demand converts directly into lost margin, 180 basis points of it this quarter.
More stores increase the capacity to sell. They create no reason to buy. And the growth they produce lasts exactly as long as the leases do. It has to be paid for again every quarter, and it never accumulates into anything the company owns.
Is this the category or the brand?
The article has to answer this honestly, because the alternative explanation is a good one.
Athletic apparel is genuinely harder than it was. Consumers are more selective, and fashion has moved away from some of the tight-fitting styles that built Lululemon. If the whole category’s comparable sales were negative, this would be a story about the category, and a much less interesting one.
Competitive share is the evidence that it runs deeper. Data from M Science, reported by Reuters, has Lululemon’s share of athleisure falling roughly 10 percentage points over the past year, with Alo up 5.9 points and Vuori up 2.2.
Share measures in this category vary a great deal depending on what is counted, so the level matters less than the direction, and the direction is consistent across the trackers. Demand is moving inside the category rather than leaving it, toward brands that barely existed a few years ago.
Guggenheim’s Simeon Siegel put it in a phrase that would have suited Burberry in 2006: “Lulu is a powerful brand but an overstretched one.”
There is one more piece of evidence, and it comes from Lululemon. Listing what is affecting the business, the 10-Q names “shifting consumer demand and brand sentiment and macroeconomic conditions.”
Brand sentiment, in the risk language of its own quarterly filing.
Lululemon has the money to fix this
The company ended the quarter with about $1.4 billion in cash and essentially no debt. Of a $600 million revolving facility, it had drawn nothing beyond $6.3 million in letters of credit. It has the rarest thing in a turnaround, which is time.
What it has been doing with that money is worth asking about.
In the first half of 2026 it repurchased $695 million of its own stock. In the first half of 2025, before the outlook was cut twice, it repurchased $716 million. Buyback spending fell about 3% while comparable sales fell 9%.
Buybacks are a reasonable way to return excess cash, and they look cleverer when the stock has fallen. But if the problem is weakening desirability, the question is what is being spent on rebuilding the product advantage that created it.
The line that never grew
One number in Lululemon’s accounts deserves more attention than it gets.
The company does not disclose what it spends on research and product innovation. Those costs sit inside a single line in the segment tables, corporate other cost of sales, which the filings define as the centrally managed support functions: product design, raw-material development and product innovation, together with sourcing, supply chain and global merchandising.
So we cannot call it R&D, and it would be dishonest to try. Sourcing and supply chain could move for reasons that have nothing to do with product.
The trend is still worth looking at.
| Fiscal year | Revenue | Corporate other cost of sales | % of revenue |
|---|---|---|---|
| 2022 | $8.1bn | $209m | 2.6% |
| 2023 | $9.6bn | $242m | 2.5% |
| 2024 | $10.6bn | $234m | 2.2% |
| 2025 | $11.1bn | $239m | 2.2% |
Revenue grew 37% over that period. Corporate other cost of sales grew 14%.
The business became much larger. The line containing product innovation barely moved.
The first half of 2026 is more pointed. The line fell 6.5%, from $128 million to $120 million, against revenue that was essentially flat.
None of this proves Lululemon is underinvesting in innovation. The number includes too much that is not innovation, and the company does not give investors the detail to isolate what is.
A second piece of evidence does not depend on the arithmetic at all, and it is in the company’s own language.
In the 2022 filing, describing a period when it was still compounding, Lululemon reported “an increase in costs related to our product departments and distribution centers as a percentage of net revenue of 60 basis points.”
In the 2024 filing: “a decrease in costs related to our product departments of 50 basis points.”
In the 2025 filing: “a decrease in costs related to our product departments of 10 basis points.”
The wording is not perfectly like-for-like, because the earlier sentence bundles distribution centers in with product departments and the later ones do not. But the direction reversed and stayed reversed. A company that once described rising investment in its product organization now describes falling investment in it, two years running.
Set that beside what the company did with its cash in the same six months:
- Share repurchases: $695 million
- Corporate other cost of sales, the line containing product design, raw-material development and product innovation: $120 million
Roughly six times more spent buying its own shares than on the whole centrally managed function that contains the work of making the product worth wanting.
That comparison needs its caveat attached to it rather than added later. These are different pools of money. Buybacks come out of capital, the product line is an operating cost, and no company can simply move one into the other. The figure is not evidence of a trade that should have been made. It is a way of seeing direction and urgency in the same frame.
Capital allocation should follow the problem
If customers are visiting, looking, and then deciding not to buy, the most valuable next dollar is probably not another store, and probably not another share.
Lululemon says its product pipeline is active, and that is not an empty claim. Management pointed to new away-from-body styles that are working, including the Groove Wide Leg and the Align Foldover Jogger, which is the right response to customers moving toward looser fits. It is also increasing marketing investment in the back half of the year to drive, in its own words, “improved brand heat.”
Two things sit awkwardly beside that.
The first is that the company is chasing a shift rather than setting one. Wide legs and foldover joggers answer where the customer has already gone. Lululemon’s history is of making the thing the customer did not know to ask for.
The second is what happened to its most visible recent launch. Lululemon briefly pulled its $108 Get Low leggings from its website after customers complained they were see-through, a failure of exactly the technical credibility that justifies the price. One product makes no pattern. But when the core franchise is down 20% and the notable new launch comes off the site over fabric, the product argument stops being abstract.
A new CEO may change the direction substantially.
Heidi O’Neill takes over on September 8 after 27 years at Nike, most recently as President of Consumer, Product and Brand, where she led the integration of the global men’s, women’s and kids’ teams. She arrives after months of interim leadership, and after a board expanded from nine to eleven seats under a cooperation agreement with the company’s founder.
What the board chose is worth noticing. It hired consumer, product and brand. That suggests the directors know which problem this is.
If weakening desirability is the real problem, the implication is uncomfortable but simple. Lululemon should start behaving as though demand, rather than supply, is its scarce resource.
That means treating fabric, fit and design as the constraint on the business, and treating selling space as the thing that follows once the product is worth traveling for. The last four quarters have run the other way round.
The company does not need more places to sell the same product. It needs products people feel they have to buy.
Burberry found its answer by going back to the trench coat.
Lululemon has the cash, the brand and the time to find its next one. What the last quarter suggests is that it has not found it yet, and that every quarter spent adding selling space instead makes the search more expensive.