Shares of Canadian athleisure retailer Lululemon Athletica Inc. have dipped 18 per cent over the last week after the company reported increased costs related to tariffs and the removal of the U.S.

de minimis exemption — showing that even big companies are taking a hit from the revoking of the duty-free shipping loophole.

In its latest earnings report on Sept. 4, the Vancouver-based brand reported net revenue grew seven per cent year-over-year to $2.5 billion in the second quarter, largely in line with analysts’ forecasts.

However, the company also reduced its outlook for the year and said it expects higher

tariffs and the removal of the de minimis exemption to reduce gross profit by US$240 million in 2025. For 2026, it expects a US$320 million net impact on its operating margin.

“The increased rates and removal of the de minimis exemption have played a large part in our guidance reduction for the year,” Lululemon chief executive Calvin McDonald said on a call with analysts.

Lululemon’s stock is down nearly 55 per cent since the beginning of the year, as the company also grapples with increasing competition in the U.S. along with a drop in consumer spending on performance activewear and apparel in general.

Aug. 29 marked the end of the de minimis rule, which allowed shipments under US$800 to enter the U.S. duty-free. Like many major retailers, including Nike Inc., Adidas AG and Gap Inc., Lululemon uses third-party suppliers and manufacturers primarily located in countries across Asia that are now subject to double-digit U.S. tariff rates.

In 2024, 40 per cent of Lululemon’s products were manufactured in Vietnam, 17 per cent in Cambodia, 11 per cent in Sri Lanka, 11 per cent in Indonesia, seven per cent in Bangladesh and the remaining 14 per cent in other regions, according to the company’s annual report.

Last year, 35 per cent of fabrics used in Lululemon products came from Taiwan, 28 per cent from mainland China, 11 per cent from South Korea and the remainder from other regions. The company also sources raw materials for content labels, elastics, buttons, clasps and drawcords mainly from suppliers in the Asia-Pacific region and mainland China.

Lululemon ships products from seven global distribution centres, four of which are in Canada. The retailer leases two facilities in Delta, B.C., and two in Ontario, located in Milton and Mississauga. Lululemon has also signed a lease on a new 980,000-square-foot office space and distribution centre, which is currently under construction in Brampton, Ont., and expected to open in fiscal year 2026.

In the U.S., Lululemon owns a warehouse in Groveport, Ohio, and leases 1.25 million square feet of space just outside of Los Angeles, in Ontario, Calif. It closed a smaller distribution centre in Sumner, Wash., at the end of last year. The company also has a single Australian distribution centre in Ravenhall, a suburb of Melbourne.

Chief financial officer Meghan Frank said about two-thirds of Lululemon’s U.S. e-commerce orders are fulfilled through Canadian distribution centres. She said the de minimis exemption helped the company realize “meaningful duty savings,” as most American orders were under the $US800 threshold.

Frank said Lululemon is taking both short- and long-term actions to mitigate increased tariff costs, and looking at new supply chain initiatives (including vendor negotiations) and enterprise-wide cost savings. Strategic price increases will be limited to the U.S., she said.

“We are looking actively at our (distribution centre) network, and part of our mitigation strategy is inventory placement and making sure we’re most efficient as we move forward,” said Frank.

The company adjusted its guidance and expects annual revenue in 2025 to grow between two per cent and four per cent (or four per cent to six per cent excluding the 53rd week of 2024) to US$10.85 billion and US$11 billion — down from its previous outlook of US$11.15 billion to US$11.30 billion.

In a research note, TD Cowen analysts said the estimated 66 per cent of U.S. online orders shipped from Canada was a “far higher” percentage than anticipated. Despite having ample distribution-centre and ship-from-store capacity in the U.S., “the financial incentive (of de minimis) was huge” and added an “unsustainable” 250 basis point annual benefit to Lululemon’s gross margin.

“We are disappointed we missed this and that the loophole was being used to this extent without more disclosure on risk,” analysts John Kernan and Krista Zuber said.

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TD Cowen maintained a “buy” rating for Lululemon’s stock, based on the brand’s value and potential long-term global growth, but cut its price target to US$220 from US$298.

Several analysts lowered their price targets following the company’s earnings report. Truist Securities downgraded from a “buy” to “hold” rating and trimmed its target to US$170 from US$290, while Telsey Advisory Group revised its rating from “outperform” to “market perform” and lowered target to US$200 from US$360. Piper Sandler maintained a “neutral” rating but reduced its price target to US$165 from US$200.

Lululemon expects U.S. revenue to decline by one per cent to two per cent this year. McDonald said the company is in the early stages of international growth and expects global revenues, excluding the Americas and China, to grow by about 20 per cent. However, realizing the benefits of its mitigation strategies will take time, he said.

“Given our financial strength and profitability, I am determined that we will not make any near-term decisions that could hurt or damage our brand positioning over the long term.”