Lululemon shares plunged 20% in after-hours trading following the company’s disappointing full-year outlook, signaling growing pressure from tariffs that are cutting into its profit margins.

While the athletic apparel giant managed to beat Wall Street’s second-quarter earnings expectations, it narrowly missed revenue forecasts and warned investors that rising import costs tied to tariffs would reduce annual profits by roughly $240 million.

For the fiscal year, Lululemon now expects earnings between $12.77 and $12.97 per share—far below analysts’ expectations of $14.45. The company also projected annual revenue between $10.85 billion and $11 billion, slightly short of Wall Street’s $11.18 billion estimate.

“We are facing yet another shift in the industry related to tariffs and the cost of doing business,” said CEO Calvin McDonald during a conference call with analysts. “The increased tariff rates and removal of de minimis provisions have been major factors in our reduced outlook for the year.”

According to data compiled by LSEG, here’s how the company performed in the second quarter compared to analyst expectations:

• Earnings per share: $3.10 vs. $2.88 expected
• Revenue: $2.53 billion vs. $2.54 billion expected

Despite beating profit forecasts, Lululemon’s overall performance remains concerning. The company’s stock has already dropped more than 45% this year, highlighting investor anxiety over slowing sales and shrinking margins.

In the latest quarter, net income was $370.9 million, or $3.10 per share, compared to $392.9 million, or $3.15 per share, during the same period last year. Gross margin fell 1.1 percentage points to 58.5%, while operating margin slipped 210 basis points to 20.7%.

Chief Financial Officer Meghan Frank said that the elimination of the de minimis exemption—previously allowing smaller shipments to avoid tariffs—had a significant effect on profitability. She estimated that this policy change accounted for about 1.7 percentage points of the 2.2 percentage-point profit decline expected from tariffs this year.

In North America, same-store sales dropped 4%, reflecting weakening consumer demand in the region. Overall comparable sales increased just 1%, missing Wall Street’s 2.2% growth forecast. During the second quarter, the company added 14 net new stores, bringing its global total to 784.

“My view is that it’s now time to reset many of our practices related to how we develop and create the range of products that will fuel the next phase of our growth,” McDonald said. “We’ve seen that when our product assortment aligns with consumer demand, everything else follows.”

For the third quarter, Lululemon expects revenue between $2.47 billion and $2.50 billion, below analyst projections of $2.57 billion. It forecasts earnings per share of $2.18 to $2.23, well under the expected $2.93 per share.

McDonald acknowledged that part of Lululemon’s challenge lies in its product strategy, admitting that some lines—particularly in the lounge and casual wear categories—have lost their appeal. “We’ve allowed our product lifecycles to run too long,” he said. “We’ve become too predictable in our casual offerings and have missed opportunities to set new trends.”

The company plans to refresh its collections and accelerate innovation to reenergize its U.S. business. McDonald outlined a strategy to increase the proportion of new styles from 23% of its total lineup to 35% by next spring and enhance fast-track design capabilities to respond more quickly to market trends.

“Our lounge and social offerings have grown stale and are not resonating with our guests,” McDonald admitted. “It’s clear we need to rethink how we inspire customers with fresh ideas.”

Despite the grim quarterly performance, McDonald emphasized that Lululemon remains focused on long-term brand health and will avoid short-term cost-cutting measures that could weaken its market position. “We are not satisfied with the results for the quarter,” he said, “and we know our brand can—and will—perform better than these results.”