Should One Shrinking Number Scare You About Lululemon Stock?
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The operating margin at Lululemon Athletica (LULU) has fallen sharply. This metric measures the share of each sales dollar the company keeps as profit after running the business. Management expects that margin to be about 6.5% in the third quarter of fiscal 2026, compared with 17% in the same quarter a year earlier. Sales in that quarter are expected to fall 10% to 11%. So why would a sales drop of that size cut Lululemon’s margin by more than half?
Lululemon Kept Spending On Stores While Sales Fell
Lululemon’s margin is shrinking because its costs have not come down with its sales. Rent and store staff cost a retailer about the same whether it sells more or less. When sales slip, profit drops by more.
In the quarter ended August 2, 2026, Lululemon’s revenue fell 4%. Management said negative commentary in the media and on social channels hurt traffic, and some new products drew a softer response than planned. Yet the company’s selling and overhead costs rose to 41.7% of sales, from 37.7% a year earlier. Management put that rise down to fixed costs spread over less revenue, more store labor hours and higher marketing spend. Gross margin was hit as well. Management said fixed costs took 230 basis points off it, and tariffs, not counting a refund, another 160.
In September, management also guided for one more cost in the third quarter of fiscal 2026. It expected markdowns to rise about 60 basis points from a year earlier, because slower sales would need additional seasonal clearance.
How Low Is Lululemon’s Margin Against Its Own Past?
Over the twelve months to August 2, 2026, Lululemon’s operating margin was 17.8%, against 22.9% a year earlier. It had been 23.0% in the twelve months to July 28, 2024. The margin has now fallen two years in a row, with the latest fall by far the larger. Of the last 40 quarter ends, going back ten years, only four showed a lower twelve-month margin.
Lululemon’s latest quarter also had help. Its operating margin of 18.8% in the quarter ended August 2, 2026, included a refund of tariffs, which management said added 560 basis points. Without that refund, the margin would have been about 13.2%, against 20.7% a year earlier. The refund sits inside the twelve-month figure too.
What Does Lululemon’s Share Price Already Assume?
The share price likely assumes that Lululemon’s profit keeps falling. The stock trades at 9.0 times its last twelve months of earnings, against 21.8 times for the S&P 500, and those earnings include the refund quarter. Over the twelve months to November 9, 2026, the stock returned -31.2%, while the S&P 500 returned 13.7%.
Management expects earnings per share of $9.48 to $9.73 for fiscal 2026, compared with $13.26 for fiscal 2025. That range already includes $0.86 a share from the tariff refund.
There is a fair case on the other side. In the quarter ended August 2, 2026, Lululemon’s selling and overhead costs rose by less than management had guided. The company credited the outcome to lower incentive pay and other cost actions. It also still produces cash. Free cash flow was $1.35 billion over the last twelve months, up from $1.17 billion a year earlier. Furthermore, management has cut its plan for new stores in 2026 to about 35, from about 40, while cutting back on pop-up stores.
For a holder, the margin is a serious worry rather than a passing one, because it has fallen over twelve months and not only in one quarter. Management has said it is taking an even more aggressive stance on expense management. Lululemon is expected to report its third-quarter results in December 2026, and its operating margin, against management’s guide, is the number to watch.
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