Lululemon, one of the few brands that has seemed immune to consumer cutbacks, surprised observers by lowering its profit forecast. While fourth-quarter sales have been strong so far, people gravitated toward its sale items, pinching the bottom line.
The news worried investors, causing Lululemon’s stock to fall as much as 10% in the hours after the announcement. The company offered reassurances that so far, it’s not feeling the global pullback in consumer spending on apparel. It says demand for its high-end workout and lifestyle clothing is still very strong.
The company, based in Vancouver, raised its revenue outlook, and is now predicting fourth-quarter sales to be between $2.67 billion and $2.7 billion.
But more of those sales came from its “Made Too Much” merchandise, especially during the post-Christmas/Boxing Day period, writes Mark Altschwager, who follows the company for Baird.
That scared off some investors, worrying that Lululemon may have to become more promotional, negatively impacting both its brand image and bottom line.
“We are pleased with our continued revenue growth, and momentum in the business as our teams navigate a dynamic macro-backdrop,” says Calvin McDonald, chief executive officer, in the announcement. He says fourth-quarter traffic for Lululemon remains strong in both physical and digital channels.
After the announcement, Lululemon executives met with analysts at the ICR Conference, and some came away sharing McDonald’s confidence.
“The near-term setup remains tricky as growth decelerates and gross margin concerns linger,” says Altschwager. “However, full-price sales remain healthy overall, markdown margins are consistent with pre-COVID, and the company is comfortable with its prior expectations for inventory. We remain encouraged by overall brand performance.”
“The brand continues to resonate well with consumers, as holiday traffic was strong both in stores and online,” writes Gabriella Carbone, an analyst who follows Lululemon for Deutsche Bank. While noting the team’s optimism, though, she thinks it likely the investor debate will continue, “as inventory levels remain elevated, leading to concerns around the potential for further markdown activity over the next few quarters.”