Lululemon Stock Drops on Weaker Gross Margin Forecast

Lululemon Athletica Inc. rattled investors Monday morning with a fourth-quarter outlook that showed some gross margin slide even as profits were seen coming in on target.

Shares of the active firm fell 9.9 percent to $296.68 in early trading as investors read the tea leaves of gross margins, which the active giant said would decline by 90 to 110 basis points this quarter instead of gaining 10 to 20 basis points, as previously projected.

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However, the firm said it would “leverage” its selling, general and administrative expenses by 100 to 120 basis points, instead of the previously expected 30 to 50 basis points, helping to keep the bottom line on track.

Lululemon narrowed its forecast for diluted earnings per share and is now seeing a range of $4.22 to $4.27 where it previously projected profits of $4.20 to $4.30. Fourth-quarter sales are slated to range from $2.66 billion to $2.7 billion, an increase of 25 to 27 percent from a year earlier. Before, the company forecast sales between $2.605 billion and $2.655 billion.

The update raised some questions about the brand situation at the business, which has constantly been ahead of the fashion and retail curve.

Simeon Siegel, a stock analyst at BMO, said stock multiples are often tied to revenues, but that the top line can be a lagging indicator.

“Quality of sales erode before actual sales,” Siegel said.

Hence, the focus on gross margins.

“Lululemon’s clearly a strong brand with a strong Wall Street fan base — count us in it — but, we fear brand saturation questions are becoming hard to ignore,” he said.

The company will be meeting with investors at the ICR retail conference this week and might offer some more color on results.

“The question is, did Lululemon take their inventory medicine, weighing on gross margins, now entering fiscal year 2023 clean?” Siegel said. “That would be the silver lining of the release. If not, and inventory remains elevated, it will be hard to ignore the margin questions we’ve been asking over the last several quarters.”

Calvin McDonald, Lululemon’s chief executive officer, said he was “pleased” with the companies’ top-line growth and momentum in a “dynamic macro-backdrop.”

“In [the fourth quarter], 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,” McDonald said. “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.”

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