The news: Lululemon is paying more to fill orders while it reworks its North American distribution network, interim co-CEO and CFO Meghan Frank said on the company’s fiscal second quarter call. Fixed costs took 230 basis points off gross margin in the quarter, and part of that was “additional fulfillment costs as we optimize our North America DC network.”
The cost continues into the second half. Lululemon expects third quarter gross margin to fall about 250 basis points, with the distribution network among the reasons.
Most of the company’s US online orders ship from Canada. Until August 2025, those parcels crossed the border duty-free.
Frank attributed part of the quarter’s $150 million of capital spending to what she called “our multi-year distribution center project.” The company used the same phrase a year ago. The building that project delivered this year broke ground in 2023.
Lululemon guides full-year capital spending of $680 million to $700 million, covering new locations, renovations, DC and technology investments. The distribution center work is one piece of it.
What changed: The majority of Lululemon’s sales to US online shoppers ship from distribution centers in Canada, according to its annual report. A significant share of those orders used to enter the US duty-free under the $800 de minimis threshold.
Lululemon is headquartered in Vancouver, and Frank has described the Canadian network as infrastructure the company already had. “Given that we have DC infrastructure in Canada, we have been well-positioned to ship some of our e-commerce orders to our US guests,” Frank said on the fiscal second quarter call a year ago. “We realized meaningful duty savings.”
She put the loss of the exemption at about 170 of the 220 basis points of tariff-related margin decline the company expected for 2025, more than three-quarters of the total.
Frank connected the two in December. An analyst asked on the fiscal third quarter call whether the large new Canadian DC had been planned partly around de minimis business. She said the review was already under way. “Given the news on de minimis, the team is deep in the work on evaluating the network,” she said, naming the DC network and inventory placement, alongside vendor negotiations, as levers for offsetting tariff costs.
That DC opened in June. Brampton, Ontario is a 980,000-square-foot building that broke ground in 2023. Element Logic automated it with 525 AutoStore robots, and says it supports e-commerce fulfillment across eastern Canada and the US.
The network now runs eight buildings:
Canada: Brampton, two sites in Delta, British Columbia, and Milton and Mississauga in Ontario, about 2 million square feet in total.
The US: an owned 605,000-square-foot DC in Groveport, Ohio, and a leased 1.26 million-square-foot DC in Ontario, California.
Australia: a 250,000-square-foot DC in Ravenhall, Victoria.
The count and the space point different ways. Canada has five of the eight buildings, but the two US sites hold about 1.9 million square feet against Canada’s 2 million, and the single largest building in the network is the leased site in Ontario, California.
How it works: De minimis let a parcel worth under $800 enter the US with no duty at all, including the regular tariff on apparel. Since the exemption ended, every parcel needs a customs entry and pays the full rate.
Goods warehoused inside the US still pay that tariff, but on a different value.
Duty is assessed on the price paid in the sale that brings the goods into the country, a rule US customs calls transaction value. For a parcel shipped from Brampton to a shopper in Ohio, that sale is the shopper’s order, so the duty falls on the retail price. For a container of the same leggings shipped to Groveport, it falls on the price Lululemon paid the factory.
The retail price is the higher of the two, so the same rate produces a bigger duty on the parcel. Shipping in bulk also means one customs entry per container instead of one per parcel.
Export Development Canada, the federal export agency, lists US fulfillment centers and consolidated shipments among the options open to exporters since the exemption ended. Lululemon has not said this is the change it is making.
The pattern: The exemption closed for Chinese goods in May 2025 and for every other country in August 2025. Three other companies that filled US orders from abroad have moved that work inside the country since.
Aritzia, the Vancouver retailer, moved all of its US online orders into an Ohio DC before the deadline. It had already expanded that building to 560,000 square feet, more than double its previous size, before the trade war started, Financial Post reported. “Previously, under the de minimis exemption, we utilized our existing supply chain network in Canada to fulfil a portion of US e-commerce orders,” CEO Jennifer Wong told the paper in October. The change proved absorbable. Trade costs put 410 basis points of pressure on gross margin in Aritzia’s fiscal third quarter, about a third of it from de minimis. Margin still rose 30 basis points, because fixed-cost leverage, better markdowns and freight more than covered the pressure, according to Supply Chain Dive.
Temu stopped shipping orders from China in May 2025, and moved US fulfillment to sellers holding inventory in the US. PDD said last month it is repeating that switch in Europe.
Shein told investors in its Hong Kong listing document that it is holding more inventory locally and adding local fulfillment partners, to cut its exposure to cross-border duties. Its fulfillment costs still rose to 47.7% of revenue in the first quarter from 42.8% a year earlier.
Aritzia has finished moving its own warehouse volume. Temu changed which sellers hold the stock, and Shein is doing some of each. Lululemon has said only that its network is under review.
The counter: Lululemon kept building in Canada while the exemption disappeared. It broke ground at Brampton in 2023, carried on through the wind-down, and opened the building 10 months after the duty break ended.
That left about two years between breaking ground and the exemption’s end. Lululemon finished the building anyway, and Frank has said the review does not mean an exit: “I don’t think it means we won’t have a presence in Canada.”
Heidi O’Neill, the incoming chief executive, has not appeared on these calls. Frank and André Maestrini are running the review as interim co-CEOs. O’Neill, a former Nike executive, arrives next week. Frank said she will evaluate “our strategy and current action plan.”
Temu resumed some direct shipments from China within months of stopping them, after a US-China truce in mid-2025 cut small-parcel duties to 54%, per PYMNTS.
What’s next: The exemption ended by executive order in August 2025. Lululemon said in its quarterly filing that the Court of International Trade ruled in August 2026 that the Supreme Court’s decision against the IEEPA tariffs does not restore it, and that legislation repeals the exemption in statute by July 2027.
