I am about to introduce a new section called Business Analysis, where I will be publishing work under Business of the Week.

Most investors make the mistake of focusing too much on the numbers and not enough on the business behind the numbers.

So I decided to start publishing my business research notes in article format more regularly. This will be a place where I break down businesses that I think are worth knowing, studying, and understanding better.

The goal is to understand how a business works, how it makes money, where the economics come from, and what makes it interesting.

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Disclaimer: This article is for informational and educational purposes only. It is not investment advice or a recommendation to buy or sell any security. Just my opinion. Please do your own due diligence before making any financial decisions.

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Summary

• Booking is mainly an accommodation business, even though it also owns Priceline, Agoda, KAYAK, OpenTable, and Rentalcars.com.

• The business is useful because travel booking still has a lot of friction: reviews, payment, cancellation, confirmation, support, and trust.

• For travellers, Booking reduces uncertainty. For hotels, it brings demand they may not easily get on their own.

• In FY2025, Booking generated $26.9 billion of revenue and about $9.1 billion of free cash flow, with very little physical capex.

• The moat is real, but it is not hard lock-in. It comes from supply, demand, reviews, trust, payment confidence, customer support, and app habit.

• Marketing is the main economic cost to watch. If Booking is building direct customer habit, marketing can be valuable. If it is only buying the same demand again and again, the business is less powerful than the headline cash flow suggests.

• Google and AI may be bigger risks than other OTAs because they sit before the booking decision and could control where travel demand starts.

• My view: Booking is a high-quality business, but its quality depends on whether it can keep turning trust into direct customer habit and AI is a risk, especially if Booking does not turn more customers into loyal mobile app users. In the future, people may ask an AI agent to plan and book a trip, and that agent may decide where the demand goes

Booking Holdings

When I book a holiday, especially with family, I am not just choosing a hotel room.

I am thinking about the whole trip.

I want to know where we will stay, how easy it will be to get there, whether the place feels right, whether the reviews are honest, and whether I can trust what I see on the screen.

Because a holiday is not just another purchase. You spend real money, you plan around it, and often you look forward to it for weeks or months.

And when something goes wrong, it does not feel like a small inconvenience. It can affect the whole experience.

I felt this myself recently during a trip abroad.

Booking.com could not really help with one of the places because it was not available on their end, so I had to deal directly with the hotel myself.

And once you do that, you realise how much friction there can be in travel. The booking, the communication, the reservation, the payment, checking the details, trying to explain something to hotel staff who may not speak the same language, even simple things can become frustrating when you are travelling.

All of these small problems add friction, especially when you are in another country and just want the trip to go smoothly.

That is why Booking is interesting to study. From the outside, it looks like a simple website for hotels and flights. But underneath, it is solving a very emotional and practical problem: helping people make travel decisions with less uncertainty.

Booking Holdings is a global online travel marketplace. Its main business is accommodation, mostly through Booking.com, but it also owns Priceline, Agoda, KAYAK, OpenTable, and Rentalcars.com. Travellers use it to find, compare, review, reserve, and pay for hotels and other travel products. Hotels and accommodation partners use it because Booking brings them demand they may not reach directly. Booking makes money mainly from merchant and agency travel reservation revenue, plus advertising and other revenue.

Travel booking has friction everywhere. When you book a trip, you are trying to balance many things at the same time: price, location, flexibility, reviews, payment, and trust.

A cheaper room does not mean much if you are not sure about the place. Good cancellation terms do not help much if the confirmation itself feels uncertain. And when you are travelling to a country you do not know, with a hotel brand you do not know, even small things like currency, payment, and cancellation can feel risky.

This is where Booking becomes useful. It reduces some of that uncertainty and makes the decision feel easier.

Booking takes all of that mess and makes it easier. It does not remove every travel risk, but it reduces enough of the risk that customers come back.

The direct hotel option is not always easy either. If I do not know the hotel, I may not feel comfortable putting my card details into its website. I may not be sure if the payment will go through safely. I may not fully understand the cancellation rules. And if something goes wrong, I may not know how easy it will be to get help.

This is where Booking becomes useful. It puts the search, reviews, price, payment, confirmation, and support in one place, and makes the whole process feel less risky.

For hotels, Booking solves the other side of the problem. A hotel may have rooms, but not enough direct demand. Booking gives it global visibility. That creates the marketplace loop: travellers come because there is supply, and hotels stay because there is demand.

The customer is not only searching for the cheapest room; they are trying to avoid a bad trip. A failed hotel booking has a high emotional cost because if the room is not there, the property is bad, or the hotel is oversold, the customer cannot just “return the product” and move on while the trip is already happening.

Booking.com

The most important product is Booking.com. This is the core accommodation engine and the place where the strongest customer habit sits.

Agoda matters in Asia, while Priceline matters more for U.S. and discount travel. KAYAK provides metasearch, Rentalcars.com supports connected trips, and OpenTable adds restaurant exposure, but none of those businesses sits at the centre of this thesis.

The business should not be analysed as if every product matters equally. Accommodation matters most. Flights, rental cars, restaurants, payments, and connected trip matter if they make Booking more useful and help customers stay inside the ecosystem. They are not automatically good just because they make the app broader.

Booking.com had about 4.5 million total properties at March 31, 2026. About 4.0 million were alternative accommodation properties and about 500,000 were hotels, motels, and resorts. Alternative accommodations were about 38% of Booking.com’s Q1 FY2026 room nights.

The Economics

Booking makes money mainly in two ways. In the merchant model, Booking is more involved in the transaction: it can collect payment from the traveller and then pay the supplier, giving it more control over checkout and customer experience while also taking on payment costs, fraud risk, chargebacks, and operational complexity.

In the agency model, Booking earns a commission or fee from the supplier after facilitating the reservation. In FY2025, Booking generated $26.9 billion: merchant was the largest part at $17.8 billion, or about 66% of the total; agency was $8.0 billion, or about 30%; and advertising and other was much smaller at $1.2 billion, or about 4%.

FY2025 gross travel bookings were $186.1 billion, with $130.1 billion coming through the merchant model and $56.1 billion coming through the agency model.

The simple revenue-to-gross-bookings ratio was about 14.5% in FY2025. I would not call that a clean take rate because revenue recognition and mix matter, but it is still useful. It shows how much economics Booking roughly captures from the travel volume moving through the platform.

The important unit-economic question is not only how many bookings pass through the platform, but how much of that demand Booking owns after paying to acquire it and service the transaction. Booking reports room nights, gross bookings, revenue, marketing expense, direct mix and app mix, but it does not disclose customer acquisition cost, customer lifetime value, or profitability for a direct booking compared with a paid booking.

The best observable test is therefore whether more booking volume produces more revenue and cash without marketing taking a larger share of the economics, while direct and app usage holds or improves. FY2025 gives a strong consolidated reading because gross bookings grew 12%, revenue grew 13%, adjusted EBITDA grew 20%, and free cash flow grew 15%, but those group figures do not yet prove that each additional customer or each new U.S. booking has the same quality of profit.

Booking is far more international in its reported economics than the brand list alone suggests. In FY2025, the company reported $24.3 billion of revenue from businesses outside the U.S., about 90% of its $26.9 billion total, while its U.S. businesses generated $2.6 billion, about 10%. Within the international figure, $21.7 billion was attributed to an entity domiciled in the Netherlands, where Booking.com is headquartered.

This breakdown measures the operating business that earns the revenue, not the traveller’s nationality or the hotel location. Booking gives the example that a U.S. customer booking a New York hotel through Booking.com is counted in its business outside the U.S. The numbers therefore show that Booking.com’s international operating base is the centre of group economics, while they do not prove how strong the Booking.com habit is with American travellers.

In FY2025, Booking booked 1.235 billion room nights, up 8%. Gross bookings reached $186.1 billion, up 12%, while revenue grew 13% to $26.9 billion. The more important point is that adjusted EBITDA grew faster than revenue, up 20% to $9.9 billion, and free cash flow grew 15% to $9.1 billion.

In Q1 FY2026, Room nights were 338 million, up 6%. Gross bookings were $53.8 billion, up 15%, or about 8% in constant currency. Revenue grew 16% to $5.5 billion, or about 10% in constant currency, and adjusted EBITDA grew 19% to $1.3 billion. Free cash flow was $3.1 billion, down 2%, but I would not over-read one quarter because Q1 cash flow has seasonality and working-capital timing.

Profit and free cash flow have grown faster than revenue in recent years, which suggests operating leverage, although travel was still recovering from the pandemic base in earlier years and the recent history should not be projected forward as a normal growth rate.

Booking can grow in a few ways. The simple version is more room nights and more gross bookings per room night. The better version is more direct and app bookings, because that means the customer relationship is getting stronger. Alternative accommodation supply can expand the market, merchant payments can give Booking more control over checkout, and connected trip products like flights and rental cars can make the app more useful.

The U.S. could be another growth area, although Booking’s position there is less obvious than its international strength. AI-assisted travel planning could also help if Booking uses it to make the product more personal and easier to use. The risk is that AI helps someone else own the customer relationship instead.

Booking is asset-light, but marketing means it is not cost-light. FY2025 marketing expense was $8.2 billion, about 30% of revenue, which is the key economic cost to understand in this business.

If Booking spends marketing money to bring in new customers who later become direct/app users, that can be good investment. If Booking has to spend more every year just to keep the same demand, marketing starts to look like maintenance capex.

I do not want to look only at reported capex. Booking’s physical capex is tiny, but the real economic reinvestment may be hidden in marketing, product development, AI, payments, and customer service.

Booking manages five operating segments but aggregates them into one reportable segment, so it does not give investors a margin for Booking.com, Priceline, Agoda, or a U.S. versus international business. At group level, FY2025 operating income was $8.8 billion, about a 33% operating margin, while adjusted EBITDA margin improved to 36.9% from 35.0% in 2024. That is excellent, but it does not tell me whether a stronger U.S. push or a wider mix of flights and alternative accommodation would carry the same profitability.

The margin pressure is visible in the model itself. Booking said the shift towards merchant transactions adds payment processing, chargeback, fraud and other costs, and can reduce operating margin even while incremental payment revenue improves earnings. It also said non-accommodation services can have lower margins as they become a larger part of the business. Revenue growth is therefore not enough on its own; the quality of this business depends on what Booking is selling, where the economics sit, and whether the expanding mix keeps the same quality of profit.

Cash flow is the best part of the business because in FY2025 Booking produced $9.4 billion of operating cash flow while spending only about $0.3 billion on capital expenditure, leaving about $9.1 billion of free cash flow, or roughly 34% of revenue.

Booking produced about $9.1 billion of free cash flow in FY2025 with only about $0.3 billion of capex.

The return profile is very strong if direct and app mix keeps improving, because marketing is then building a customer relationship rather than repeatedly buying the same demand. If demand has to be bought again and again, the business is still good, but less powerful than the headline free cash flow suggests.

Trust Must Become Direct Habit

Booking’s moat is strong, but it is not the same type of moat as enterprise software.

There is no hard lock-in. A customer can use another website tomorrow. A hotel can also try to get direct bookings. But Booking has built something valuable through a combination of supply, demand, trust, and habit.

It has a large global supply base, millions of travellers searching and booking, years of reviews, booking history, payment trust, customer support, and service recovery.

The mobile app also helps because over time Booking becomes less of a search result and more of a habit. When people travel, many naturally open the app first.

The supplier side is important too. Many hotels still need Booking because it brings them demand they may not easily get on their own.

Then there is the data and ranking layer. Booking is not just showing hotels randomly. It is trying to match customers with the right property based on price, location, reviews, cancellation terms, availability, and past behaviour.

So the moat is not one single thing. It is the combination of all these small advantages working together.

Customers can open another travel app in seconds, so Booking does not have the hard lock-in of core enterprise software. What it does have is the customer’s memory of where a booking felt safe, and in travel that confidence has value.

I would describe this as a strong trust-and-demand moat, but not an unbreakable lock-in moat. Booking’s direct room nights were a mid-fifties percentage of total room nights over the trailing twelve months ended March 31, 2026, while the app mix was in the high-fifties percentage and most app room nights were direct. Those numbers suggest Booking is not only buying traffic, because a real customer habit is already there.

But management has also said SEO traffic has declined and may keep declining in the short to medium term. Google has always been one of the biggest power centers in online travel, and AI can make this even more complicated. If customers ask an AI agent to plan and book a trip, Booking may not be the first interface anymore.

Booking does not automatically lose if AI changes the interface, but it has to remain useful inside that world rather than merely visible in old search results. It needs to be more agentic, more personalized, and still trusted at the transaction layer, because the risk is not that travel disappears but that someone else owns the customer journey.

Booking competes with Expedia, Airbnb, Google, hotel chains, local OTAs, metasearch, credit-card travel portals, and eventually AI travel agents.

Expedia is still large and strong in parts of the market. In Q1 FY2026, Expedia had $35.5 billion of gross bookings, $3.4 billion of revenue, 113.9 million booked room nights, and $542 million of adjusted EBITDA. Its B2B business is growing quickly, which matters because Expedia can pressure travel supply and distribution even if it does not beat Booking everywhere.

Expedia management also called out the strength of B2B growth. Expedia does not need to beat Booking in consumer hotel search to still become a stronger distribution partner behind other travel platforms.

Airbnb owns a different but powerful customer habit. In Q1 FY2026, Airbnb had 156.2 million nights and seats booked, $29.2 billion of gross booking value, $2.7 billion of revenue, and $519 million of adjusted EBITDA. Airbnb is strongest where customers want homes, space, local stays, and group travel. Management is also pushing the company beyond stays into services, experiences, and hotels.

Google and AI may be a bigger risk than other OTAs, because they sit before the booking decision.

Before someone chooses Booking, Expedia, Airbnb, or a hotel website, they often start with search. If Google or AI tools control that discovery layer, they can influence where the customer goes first.

Hotels and chains are also competitors. They can push loyalty, member discounts, and direct booking. But for independent hotels and international trips, Booking still solves a real trust and demand problem.

If Booking disappeared, customers would use Expedia, Airbnb, Google Travel, hotel websites, credit-card portals, local travel sites, or travel agents. Technically, switching is easy because a customer can open another app in seconds. Emotionally, the decision is harder because they still need to trust the payment, the hotel, and the confirmation that the booking will really be there, which is where Booking continues to have value.

Cash Returns Need Discipline

Booking returns a lot of cash: in FY2025 it produced about $9.1 billion of free cash flow, repurchased $6.4 billion of stock, and paid $1.2 billion in dividends. In Q1 FY2026, it repurchased another $3.6 billion of stock and still had $18.2 billion remaining under the repurchase authorization at March 31, 2026.

The balance sheet gives management room to do this. At the end of Q1 FY2026, Booking had $16.5 billion of cash, cash equivalents, and investments, compared with $18.6 billion of senior notes principal outstanding, leaving rough net debt of about $2.1 billion against a business producing very large cash flow.

Buybacks make sense for a business like this because the company produces more cash than it needs for physical reinvestment, but they create value only if the stock is bought below intrinsic value and management is not starving the business of investment in product, AI, payments, direct traffic, and supply quality. The real test is per-share free cash flow over time.

The balance sheet does not look fragile relative to the cash generation of the business; the bigger risk is whether Booking has to spend more to defend demand, not the debt itself.

Distribution And Trust Can Weaken The Business

The reported revenue base also show how important international operations are for the company. But its position with American travellers is less clear. The U.S. revenue number does not really tell us how strong the customer habit is there, because it is not measured by where the traveller is located. Priceline gives the group a U.S. presence, but Expedia and Airbnb may already have stronger customer habits in that market. If Booking has to spend heavily to build that habit in the U.S., that growth may not come with the same margin profile as its more established international business.

The bigger pressure starts with distribution. Direct room nights and app usage suggest Booking already has a real customer habit, but SEO traffic is under pressure, marketing is still a large cost, and AI could change how people start planning travel. If customers begin asking AI agents to plan and book their trips, Booking may not always be the first place they go. Booking can still remain important if it becomes more personalised, more useful in the app, and still necessary for supply, pricing, payments, and execution. But if someone else owns the customer’s first step, Booking may still do part of the work while losing some control of the relationship.

Product mix is another thing to watch. Merchant transactions can improve the booking experience because Booking has more control over payment and checkout, but they also bring extra costs: payment processing, chargebacks, fraud risk, and more operational complexity. Alternative accommodation helps Booking compete with Airbnb, and flights or connected-trip products may make the app more useful. But more volume is not automatically better volume if those areas have lower margins or weaker economics than the core accommodation business.

The business weakens when Booking has to work harder to keep the same customer. If fewer people go to Booking directly, the habit is not as strong. If marketing becomes more expensive, Booking may be spending more just to stay in front of the customer. If people stop opening the app first, then Google, AI agents, hotel websites, or other platforms have more power over where the customer goes.

And because trust is such a big part of the product, one serious issue around payment, fraud, data, or customer service can damage the relationship quickly. People use Booking because it makes travel feel easier and safer. If that feeling starts to weaken, the moat weakens with it.

The main risk is not that people stop travelling. People will travel. The bigger risk is that Booking becomes less important in the customer’s mind. If customers start their journey somewhere else, Google, AI agents, hotel websites, Airbnb, Expedia, or another platform, Booking may still handle some of the transaction, but it may not own the customer relationship in the same way.

My Business View

Booking is a high-quality travel marketplace because it solves a real problem in travel.

Travel booking still has friction everywhere: reviews, payment, cancellation, confirmation, support, and trust.

This is why I personally trust Booking. In many cases, I prefer to go through Booking rather than deal directly with a hotel I do not know. The direct hotel option can sometimes be cheaper, but it can also bring more friction around payment, communication, cancellation, and support. Still, Booking also needs to stay competitive on price, because customers will compare.

The business has low switching costs, heavy marketing spend, Google and search exposure, AI risk, regulation, and competition from Airbnb, Expedia, hotels, and local players.

The marketing side is one of the parts I do not fully like. The question is whether Booking’s marketing brings in customers once and turns them into loyal direct or mobile app users, or whether the company has to keep paying again and again for the same demand.

AI is also a risk, especially if Booking does not turn more customers into loyal mobile app users. In the future, people may ask an AI agent to plan and book a trip, and that agent may decide where the demand goes. Booking may still be involved in the transaction, but someone else could own the customer’s first step.

The core still looks strong because Booking has scale, cash flow, direct and app habit, global supply, and a customer use case that is easy to understand. I do not think of it simply as an online travel agent. I think of it as a trust layer for global accommodation.

What surprised me was the lack of real coverage that explained what actually happened. Most posts just repeated the headline: “Gartner missed” or “guidance”.

Adjusted EPS was $3.94. Revenue grew 2% to $1.8 billion. Free cash flow was $271 million in the quarter.

They bought back $500 million of stock in Q4 and $2.0 billion for the full year.

The stock still fell because the market fixated on one metric: contract value growth.

In Q4, global contract value reached $5.2 billion but grew only 1% year over year. Ex-U.S. Federal, growth was 4%. That number alone was enough to change perception. Not because it is a collapse, but because it is far from what investors were used to paying for.

This was not driven by client losses.

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Clients are renewing. In Global Business Sales (GBS), client retention was 86% and wallet retention was 99%. The issue was expansion. Companies are keeping Gartner but delaying decisions to add seats, expand usage, or increase scope.

Management described the pattern as budgets are under pressure, approval levels are higher, and buying cycles are longer. When spending decisions move from CIOs to CFOs, expansion slows first. Renewals hold, but growth inside the account gets harder.

Government was a clear headwind.

U.S. Federal clients faced efficiency initiatives and funding changes, and management said this reduced contract value. They also said that at year-end they had only $126 million of U.S. Federal contract value remaining. Ex-federal growth was roughly 330 basis points higher, which helps isolate the impact.

But it was not only government.

In the core Global Technology Sales (GTS) segment, which is roughly $3.9 billion of the total business, contract value was flat year over year. That matters because it shows the behaviour across private enterprise too. This was not a single customer problem. It was broad budget behaviour.

Some investors pointed to AI as the cause. Management pushed back on that.

They said they track whether clients raise AI as a substitute during sales and renewal conversations, and they do not see it as meaningful. They also said AI is the biggest topic clients ask about. Gartner said it produced over 6,000 AI-related documents and had about 200,000 in-depth client conversations on AI in 2025. The message was simple: clients are not replacing Gartner with AI tools. They are using Gartner to make AI decisions.

The seat model is still the pressure point.

Gartner’s model works best when organisations are hiring. Hiring has been flat. When employees leave and roles are not refilled, seats get removed. That hurts expansion even when the relationship is stable.

Management is responding by trying to increase engagement and speed so the value stays clear even when headcount does not grow. They gave an example: they reduced creation time for some high-value research outputs (like Magic Quadrants) by 75%.

Why does that matter?

Because Gartner compounds through renewals. More engagement now can show up as higher contract value later, often 12 to 24 months later when contracts come up for renewal. The company is investing now to affect that later outcome.

Management guided for 2026 revenue of at least $6.455 billion and adjusted EPS of at least $12.30. The market did what it always does: it discounted uncertainty immediately.

Why the market listened, and why other software names moved

Gartner is a read-through on enterprise budgets.

When Gartner says expansion is slower because approvals are tighter and buying cycles are longer, the market applies that logic across other companies that rely on seat growth, upsells, and budget confidence.

That’s why names like $CRM, $NOW, $SAP, and $TTD moved with it. Different products, same behaviour: expansion is the first thing customers delay.

The Nasdaq was down about 2% on the day. In that kind of market, any confirmation of slower demand leads to multiple compression. This was not “bad news.” It was “less certainty.”

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Valuation reset

When a stock drops hard, investors assume the business is in trouble. Sometimes that is true. But sometimes the business is fine and the market is repricing the stock because the growth story changed.

The cash flows can still be there. Retention can still be there. Margins can still be there. What changes is the expected pace of expansion, and the multiple investors will pay while they wait.

That is what this felt like.

Gartner did not show stress in the core subscription model. Renewals held, margins held, and buybacks continued. The market reaction was about contract value growth slowing, which reduces confidence in the next 12–24 months.

When confidence drops, the multiple compresses first. The income statement follows later, if the slowdown persists.

Valuation

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

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North America: Selling More, Earning Less

Nike’s biggest market, is a mix of good and bad news.

The good news is that sales are finally growing again. This is a huge signal that the brand is healthy. The bad news is that they made less profit on those sales. There are two main reasons for this. First, they had to discount old inventory to clear it out. Second, and more importantly, tariffs hit them.

Management said these tariffs took a massive bite out of their profits. In fact, if you removed the cost of those tariffs, their profit margins would have actually gone up, not down. This tells me that the business operations are improving, but government fees are eating up the gains.

Greater China

While North America is showing signs of life, China remains a major weakness. Sales there dropped 17%. The company is struggling with intense local competition and mismanagement in the region.

To understand how serious this is, just look at Lululemon. While Nike’s sales are shrinking double-digits in China, Lululemon is growing about 25% in the same market. Nike stock is priced like a fast-growing company, but right now, competitors are the ones actually delivering that growth overseas. This difference is the main reason I currently prefer Lululemon’s position.

The Numbers at a Glance

• Revenue: Sales were essentially flat at $12.4 billion.

• Profit Margins: Dropped significantly, mostly due to the tariffs I mentioned.

• Inventory: They have successfully lowered their stockpile of unsold goods, which is a good sign.

• Cash: Their cash pile shrank by about $1.4 billion because they spent money on dividends and buying back their own shares.

The Outlook: More Pain Ahead

Nike warned that the next few months will still be tough. They expect sales to drop slightly in the upcoming quarter. They also expect profit margins to fall again, almost entirely because of the tariff costs. Without those taxes, they would be making money, but as it stands, their profits will be squeezed. On top of that, they plan to spend more money on marketing to try and boost demand.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. The views expressed here are my own and should not be taken as a recommendation to buy or sell any security. I do not currently hold a position in the stock mentioned in this report. Please conduct your own due diligence or consult a certified financial advisor before making any investment decisions.

My Take

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Lululemon shares jumped more than 10% after earnings, and while that might seem surprising given ongoing concerns about U.S. consumer demand, the reaction becomes understandable once you read the earnings call carefully.

If you want more background, I wrote about this business three months ago in Zero Returns in Six Years, and my thinking hasn’t changed much after this quarter.

Three things mattered most to the market:

• Revenue and earnings per share beat expectations

• International growth remained strong, led by China

• A CEO transition was announced, opening the door for a strategic reset

Lululemon Q3 2025 Earnings: Key Financial Results

• Revenue: $2.6 billion (+7% YoY)

• Comparable sales: +2%

• Gross profit: $1.43 billion

• Gross margin: 55.6% (down 290 basis points)

• Operating income: $436 million

• Earnings per share: $2.59 (down YoY, but above expectations)

Despite margin pressure, Lululemon delivered better-than-expected revenue and EPS, the main reason the stock moved higher.

Lululemon Beat Revenue and EPS Expectations

The earnings beat did not come from North America.
It came from international markets, especially China.

China Mainland

• Revenue growth: +46%

• Comparable sales: +25%

• Strong demand for outerwear

• Q3 benefited from timing of 11/11 e-commerce activity

Rest of the World (Europe & Asia-Pacific)

• Revenue growth: +19%

• Comparable sales: +9%

• Continued store expansion and solid execution

International growth more than offset U.S. weakness.
That stronger-than-expected top line also helped reduce the impact of tariffs and supported earnings per share.

North America Remains the Key Weakness

Management was unusually clear about this.

• Americas revenue: –2%

• Comparable sales: –5%

• U.S. revenue down 3%, Canada roughly flat

Importantly, management does not believe this is a brand problem.

They are still:

• growing total and retained guests,

• acquiring new customers across age groups.

The issue is lower visit frequency and spend, particularly among high-value customers.

They also admitted the product mix in North America is not right. Some core franchises stayed on shelves too long without enough newness. In a more promotional retail environment, consumers are trading down and waiting for value.

This looks like a product-cycle and macro issue, not a deterioration of brand equity.

How Management Plans to Fix the U.S. Business

Management outlined a clear three-pillar turnaround plan.

1. Product Creation

• Increase new style penetration to 35% by next spring

• Shorten product cycles from 18–24 months to 12–14 months

• Build “chase” capabilities to quickly reorder winning products

2. Product Activation

• De-clutter stores so newness stands out

• Improve local store curation

• Upgrade in-store storytelling and website experience

• Use membership initiatives to re-engage high-value customers

3. Enterprise Efficiency

• Offset tariffs through vendor negotiations and supply-chain efficiency

• Selective pricing actions

• Tight cost discipline during the reset

This is not a quick fix.

Margins: Short-Term Pressure

Gross margins declined due to:

• higher tariffs,

• increased markdowns,

• a more promotional consumer environment.

However, margins were better than management originally guided, helped by higher revenue and disciplined expense control.

Profit dollars increased even as efficiency declined.

CEO Transition: Why the Market Liked It

After seven years, the CEO will step down early next year. Interim leadership will run the business while a permanent successor is selected.

From an owner’s perspective, the timing makes sense.

This transition comes:

• at the end of a multi-year plan cycle,

• at a moment when the U.S. business needs renewal,

• while international momentum remains strong.

Markets often welcome leadership change when execution needs improvement but the underlying brand remains intact.

Lululemon 2025 Outlook and Guidance

Management reaffirmed full-year guidance:

• 2025 revenue: approximately $11 billion

• 2025 EPS: $12.92–$13.02

They also flagged a meaningful headwind:

roughly $210 million reduction in operating income from tariffs and the removal of the de minimis exemption (net of mitigation).

Margins will remain under pressure in the near term, particularly in Q4.

My Take as a Shareholder

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It’s rare to see a company of this size grow revenue double-digits and grow profit even faster, and I think this is exactly where the market is overlooking what’s happening.

Revenue was up 15%, and gross profit grew 22%.

What Drove the Numbers

High-margin businesses like domestic games, international games, and advertising are growing faster than the rest of the company. Marketing services grew 21% thanks to AI-targeted ads.

International games reported +43% growth, but management said this spike was a one-off from upfront recognition of Dying Light. My estimate is that this added roughly ¥3.5–4.5B of “extra” revenue this quarter. Without it, overall revenue would have grown closer to 12–13%.

Margin + Cost Efficiency

One thing that jumps out is how efficient Tencent is today. After the pandemic and during China’s economic slowdown, they tightened the organisation and made it leaner, and we still see the benefits today.

G&A grew only 2% while the business grew 15%.
Gross margin improved from 53% to 56%, helped by high-margin game revenue, stronger ads, and better cloud profitability (management said they’ve taken steps to optimise cloud margins and it’s working).

CapEx was down 24%, but not because they’re cutting AI investment. Management clearly said it’s a payment-timing mismatch and chip scarcity — they actually want to spend more, but GPU supply is the bottleneck. So the AI investment story is intact.

Cash + Buybacks

Free cash flow came in at RMB 58.5B, basically flat YoY.
Total cash reached RMB 493B (+16% YoY).
Net cash rose to RMB 102B (+7% YoY).

They continued their buybacks as well, repurchasing 35.4 million shares for roughly HKD 21B.

Overall, this was a very good quarter. Tencent is still one of the few large companies that can grow double-digits, expand margins, and turn that into stronger profit growth. A high-quality business getting stronger.

This is not investment advice. I share my research and views for educational purposes only. Please make your own decisions based on your own judgement.