Dive Brief:
- The de minimis exemption's end and higher tariffs "played a large part" in Lululemon reducing its revenue and earnings expectations for 2025, CEO Calvin McDonald said on the retailer's Sept. 4 earnings call.
- The retailer is taking various steps to limit the financial impact of trade upheaval, including negotiating lower vendor rates and increasing prices selectively. Lululemon still anticipates its 2025 gross profit will take a $240 million hit due to higher duties and no more de minimis, per a Q2 securities filing.
- "Companies across our industry are looking at various levers to navigate this period, including opportunities across their supply chains, expense management and strategic pricing actions," McDonald said. "We are doing the same. However, realizing additional benefits will take time."
Dive Insight:
Many retailers and online merchants are adjusting their supply chains for the de minimis-less era. Until its elimination on Aug. 29, the exemption allowed sub-$800 imports to enter the U.S. duty and tax-free, enabling cost-effective fulfillment of individual shipments across borders.
About two-thirds of Lululemon's U.S. e-commerce orders are fulfilled through Canada, and the majority would have qualified for the exemption historically, CFO Meghan Frank said on the call. As of Feb. 2, the company leased seven distribution centers, four of which were in Canada.
Now, U.S.-bound shipments from the retailer's Canada facilities are subject to duties they previously could avoid, increasing fulfillment costs, according to the Q2 securities filing.
"This removal will have a significant impact on our gross margin and represents approximately 170 basis points of the 220 basis point tariff-related decline we now expect for the year," Frank said of the de minimis elimination.
Beyond price adjustments, the company is also "looking actively at" its distribution center network and pushing for efficient inventory placement to blunt the impact of de minimis' end, according to Frank.
Despite its mitigation plans, Lululemon anticipates a $320 million net impact on its 2026 operating margin due to higher tariffs and the de minimis exemption's removal, Frank said.
"This impact reflects our best estimate, recognizing the actual effect could vary depending on how conditions evolve and our mitigation efforts perform," she said.
The tariff pressures come as Lululemon navigates stalled growth and slow consumer demand in the U.S.
