Shares of Lululemon Athletica (LULU, Financial) surged after the company raised its Q4 revenue and EPS guidance, citing a robust holiday shopping season. Despite a challenging year marked by a 25% stock decline due to sluggish consumer spending, increased competition, and product missteps, LULU's Q3 earnings report on December 5 signaled a turnaround. This was driven by strong international performance and improvements in the Americas business, now under a new product team structure.

For Q4, LULU expects revenue growth of 11-12%, reaching $3.56-$3.58 billion, up from the previous $3.475-$3.510 billion guidance. EPS is projected at $5.81-$5.85, compared to the earlier forecast of $5.56-$5.64. CEO Calvin McDonald noted a solid start to the holiday season, with healthy traffic in both e-Commerce and store channels over Thanksgiving.

The positive sentiment has fueled a 17% stock rally since the Q3 earnings report. Continued improvement in the Americas could lead to further gains for LULU. Last year, a limited spring product assortment hurt sales, with Americas' comparable sales growth dropping to flat in 1Q25 and -2% in 2Q25. However, last quarter showed signs of recovery, with Americas' net revenue up 2% and U.S. demand stabilizing. Notably, LULU achieved this without relying on markdowns, as reflected in a 40 bps rise in adjusted gross margin. The company also raised its Q4 gross margin guidance, now expecting a 30 bps increase.

Internationally, LULU is thriving, particularly in China, where Q3 comps jumped 24% in constant currency. The company's direct sales strategy, including wellbeing events and activations, has been highly effective in this market.

The key takeaway is that LULU's turnaround is gaining momentum after a tough year, despite macroeconomic challenges. The company's affluent customer base and improved product offerings position it well against competitors like Athleta, Alo, and Fabletics.