Lululemon Shares Tumble on Profit Warning for Holiday Quarter

Lululemon Shares Tumble on Profit Warning for Holiday Quarter

The big holiday crowds didn’t translate into the big gains Wall Street expected from Lululemon Athletica Inc. LULU -8.53%

Shares of the yoga pants maker fell on Monday after the company warned that its profit margins will fall in the quarter ending Jan. 29 and set profit targets below what Wall Street had expected from the popular brand.

Lululemon’s warning came after department store giant Macy’s Inc. M -6.96% had warned that fourth-quarter sales would be in the low to mid-point of its guidance range. Macy’s Chief Executive Officer Jeff Gennette on Friday said the slump in off-peak holiday weeks was deeper than the company had anticipated.

Not all clothing chains have struggled this holiday season. On Monday, American Eagle Outfitters Inc. AEO 0.67% and Abercrombie & Fitch Co. said fourth-quarter results were better than expected, pushing both stocks higher.

Lululemon CEO Calvin McDonald said shopper visits remain strong in the fourth quarter across physical and digital channels. He did not explain in a press release why profit margins shrank, but was expected to meet with investors at a conference in Orlando, Fla., this week.

Lululemon ended the third quarter with inventory up 85% compared to the year-ago period.

Mr. McDonald told analysts in December that the company had built inventories on purpose because they were so weak in 2021. He said basic styles that carry limited downside risks made up almost half of total inventory.

Analysts are concerned that Lululemon’s strong sales and earnings gains may be coming to an end. “Looking ahead we see dark clouds forming,” Jefferies analyst Randal Konik wrote in a research note on Monday. He said the company is struggling to replicate its strong performance earlier in the pandemic and is struggling with high inventories and growing competition.

Mr. Konik said Lululemon’s average discount in November was 4.7 percentage points higher than the same month a year ago. It said 41% of items were on sale, an increase of 10 percentage points. He expects higher promotional activity to weigh on profit margins going forward.

Mr. Konik also said Lululemon’s acquisition of Mirror, which offers LCD screens for home gyms and online fitness classes, continues to be a drag on revenue. “We believe the company is likely to experience less adoption than originally anticipated,” he said in his note.

On Monday, Lululemon raised its revenue expectations but warned that it now expects a decline in profit margins. It forecasts earnings for the final quarter of the fiscal year between $4.22 and $4.27 per share, compared with previous guidance of between $4.20 and $4.30.

Lululemon, which last April unveiled a five-year growth plan to double revenue by 2026, posted earnings per share of $3.36 in the year-ago fourth quarter.

Revenue for the three months ending Jan. 29 is now seen in a range of $2.66 billion to $2.7 billion, up between 25% and 27% from a year ago and ahead of the previous target of $2.61 billion to to 2.66 billion dollars.

Lululemon shares fell more than 9% in morning trading after ending last week at $329.26. The stock has fallen more than 10% over the past 12 months through Friday’s close, compared with a 28.4% decline in the S&P Retail Select Industry Index.

— Robb M. Stewart contributed to this article.

Email Suzanne Kapner at [email protected]

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