Is Lululemon in Trouble?

Investing

Published: December 8, 2023 9:15 am

Last Updated: December 8, 2023 9:18 am

Lululemon Athletica Inc. (NASDAQ: LULU) built itself around women’s athletic gear. It expanded the types of clothes it made for women and then expanded into the men’s market. Moreover, it also has opened a line of athletic equipment, which includes water bottles and key chains. The company further diversified its inventory as it added shoes. Direct competition or an anticipated slowdown in sales across retail in general as the holiday season moves into full swing dampened Lululemon’s earnings forecast. The stock took a beating as a result.

Earnings for the quarter that ended October 29 were tepid. Revenue did post healthy growth to $2.2 billion from $1.9 billion in the same quarter a year ago. However, net income did not do as well. It dropped from $255 million to $249 million. CEO Calvin McDonald was optimistic: “This was another strong quarter for lululemon as our innovative product offerings and community activations continued to powerfully resonate with our guests globally.” However, overall, investors did not view the results that way.

Should Lululemon Investors Be Worried?

Management said that revenue in the fourth quarter could grow as little as 13% to $3.1 billion, which is especially poor because holiday season sales are robust for most retailers. Lululemon said it would buy back $1 billion of stock, which usually raises earnings per share in the future, but the announcement did not help. The trigger for concern was a hint of pessimism based on a statement by management: “We remain aware of the uncertainties in the macro environment, and we continue to plan a business for multiple scenarios.” (Customers are abandoning these 25 brands.)

Recently, Lululemon stock has been on a run and the share price is up 45% year to date. Most of that gain has been in the past month. The quarterly earnings results and forecast dropped the stock by 3%. Barron’s made the point that concerns have spooked traders.

Lululemon shareholders will need to wait a quarter to find out if the anxiety about results is correct.

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