Lululemon's Southeast Asia Supply Chain Hit Hard by Trump Tariffs

Wall Street Journal

03-04-2025

Lululemon LULU -10.28%decrease; red down pointing triangle finds itself directly in the crosshairs of President Trump's trade war as the bulk of its apparel is sourced from Southeast Asia.
The Vancouver, British Columbia, based active-wear brand is bracing for a tariff hit that could squeeze profit margins and push retail prices higher in the U.S., its biggest market, testing how loyal customers are to its $120 yoga pants, analysts say.
'We estimate blended tariff impact at nearly 40%, as the bulk of lululemon's products are sourced from countries that are set to be targeted with outsized tariffs,' William Blair analyst Sharon Zackfia said in a report.
Shares fell 12% Thursday, to $249.93, and are down about 34% since the year began.
Announced on April 2, Vietnam, which produces about 40% of lululemon's merchandise, will be slapped with a 46% tariff on U.S.-bound imports. Cambodia and Sri Lanka, which make nearly a combined one third of the company's products, will have 49% and 44% tariffs applied, respectively.
The company's full-year forecasts, which already call for the slowest sales growth on record, only baked in tariff pressure from China and Mexico. That may have been optimistic, given Trump's global tariffs plan targets more countries than lululemon accounted for.
Even after Tuesday's tariff news, uncertainty remains constant. 'Tariff policy is still in flux,' Baird analysts said. 'Large Vietnam sourcing exposure presents risk to the extent reciprocal tariffs are announced.'
Lululemon gets a little more than 60% of sales in the U.S. at roughly a 70% merchandise margin, Zackfia estimates. She added that with the additional tariffs on countries in Southeast Asia, profit margins will be hit hard, by about 700 basis points.
As high as the tariffs are, lululemon's gross margins in the fourth quarter stood at 60.4%, which Zackfia said gives the company leeway to absorb the brunt of the tariffs.
Still, the retailer will have to adjust prices for shoppers. 'We estimate an 11% to 12% across-the-board price increase in the U.S. would fully protect dollar profit, albeit diluting margins,' she said.
Lululemon's supply chain puts the company among the retailers at the greatest risk of exposure, according to Raymond James's Rick Patel. 'We estimate tariff risk by taking into account U.S. penetration and sourcing exposure by country and we conclude those most exposed to new tariffs include . . . Lululemon,' he said.
Lululemon, like other North American retailers, has spent years reducing its exposure to China in favor of other Asian countries in response to Trump's first-term trade spat with the country. Randy Konik, an analyst at Jefferies, said that companies have fewer options now to find haven from tariffs.
'The new tariffs now make those moves fruitless,' Konik said. 'Production can't be moved again so companies like Lululemon will see cost pressures rise and margins go lower.'
Write to Adriano Marchese at [e-mail]