Local ShoppingLululemon’s stock drops after margin warning

Lululemon’s stock drops after margin warning

Dive Brief:

  • Lululemon cut its gross margin guidance significantly on Monday, now expecting a Q4 decline of 90 to 110 basis points compared to a previously estimated increase of 10 to 20 basis points.
  • The athleticwear brand also raised its fourth-quarter revenue outlook to between $2.66 billion and $2.7 billion, up slightly from previous estimates of $2.605 billion to $2.655 billion, per a company press release. 
  • Lululemon also narrowed its diluted earnings per share expectations, now at $4.22 to $4.27 for Q4 compared to the previously anticipated range of $4.20 to $4.30.

Dive Insight:

Lululemon’s announcement set a sour note for the brand on Monday, as reflected by its falling stock price — which dipped below $300 at one point, from Friday’s $329. Company leadership nevertheless expressed optimism about the business’ status.

“We are pleased with our continued revenue growth and momentum in the business, as our teams navigate a dynamic macro-backdrop,” Calvin McDonald, Lululemon CEO, said in a statement. “In Q4, traffic remains strong across both physical and digital channels, and we anticipate delivering another quarter of solid earnings growth consistent with our updated EPS forecast. 2022 has been a strong year for Lululemon, and we remain focused on the significant opportunities ahead as we continue to deliver on our Power of Three x2 growth plan.”

While the gross margin update is somewhat out of the ordinary for the retailer, all hope isn’t lost, according to some analysts. The fourth quarter brought on a set of pressures that have disrupted the brand’s typical performance, according to GlobalData Managing Director Neil Saunders.

“Foremost among these is a modest increase in discounting in order to clear down inventory. While discounting is nowhere near as excessive as other retailers, Lululemon’s inventory position is much higher than last year and, as a result, there has been a modest uplift in markdowns and provisions,” Saunders said in emailed comments. “Despite the negative reaction to Lululemon’s update, the business is still in a very strong position.”

Despite the gross margin miss, there are still several silver linings for the company, with top-line trends still strong and inventory levels likely having peaked, according to Wedbush analyst Tom Nikic.

But, for BMO Capital Markets analyst Simeon Siegel, Lululemon’s news highlights larger questions about the brand’s next stage.

“[W]e fear brand saturation questions are becoming hard to ignore,” Simeon said in emailed comments. “Should we applaud attempts to grab new customers, or ask whether they are hitting brand saturation, which is generally followed by dilution on stretched-revenues, leading early adopters to new emerging brands?”

Lululemon in December reported Q3 sales grew 28% year over year, while net income increased by about $70 million. On a call with analysts at the time, CEO McDonald said Black Friday had been its “biggest day ever” for sales and traffic.

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