In an effort to get ahead of impending tariff-fueled port congestion, Canadian clothing retailer Lululemon will be increasing its international airfreight shipments before the fall.
PJ Guido, Lululemon’s CFO, brought up the shift during a June 12 conference call to discuss Q1 results, when he mentioned that the company expects “gross margin to be flat to up modestly versus Q2 of last year.” He said that their guidance reflects a “modest impact from potential new tariffs” and “additional costs to airfreight product” as the company tries to dodge the resulting anticipated increase in congestion at Asian ports.
The negative impact that the company anticipates from the tariffs and congestion should come mostly during Q3, Guido said, though he noted that some of the impact would have been incurred regardless of the new tariffs.
“We are committing to higher airfreight usage as a hedge against disruption in ocean shipping lanes as we approach the key dates related to tariff increases,” he said. “This will ensure delivery of new product for our guests on time.”
Outside of the anticipated impact from tariffs, however, Lululemon is doing well in Asia – especially China. Their market in the country grew nearly 70% this past quarter, and had strong store openings in three new cities. The company is “on track to open 10 to 15 stores in China this year,” Stuart Haselden, Chief Operating Officer and VP of International, said during the conference call. The company is also continuing to invest in its China e-commerce market, with the relaunch of its .cn website in Q1 to complement its “presence on Tmall and WeChat,” Haselden said. “These investments are paying off as we saw our China e-com revenues increase over 100% in Q1.”
Regarding the impact of tariffs on Lululemon’s U.S.-China shipments, Guido pointed out that the company’s “direct exposure to China is relatively small,” with 6% of its finished goods exported from China to the U.S. Only 1% of its finished goods exported from China are subject to current tariffs; after the new rates are implemented, however, the remaining 5% would also be subject to tariffs.
“So that’s the direct impact,” he said. “The better part of the expense is really coming from this indirect exposure we have.” Lululemon is anticipating port congestion to begin around mid to late July, and thinks it’s “prudent and important to deliver new products” and “protect the sales associated with those goods,” Guido added in explanation of the company’s increased airfreight utilization.