Lululemon Athletica drops 10% on expectations margins will further contract in Q4, analysts disappointed By Investing.com

By Senad Karaahmetovic

Lululemon Athletica (NASDAQ:) shares are set to open sharply lower today after the company updated its Q4 guidance.

While the athletic apparel retailer expects to report above-consensus Q4 , the company disappointed investors by noting “it now expects gross margin for the fourth quarter of fiscal 2022 to decline 90-110 basis points compared to its previous expectation for an increase of 10-20 basis points.”

“We are pleased with our continued revenue growth and momentum in the business, as our teams navigate a dynamic macro-backdrop. 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,” said Calvin McDonald, Chief Executive Officer.

Lululemon said it now expects to report EPS in the range of $4.22-4.27 on revenue of $2.66-2.70 billion, which compares to the prior guidance for EPS of $4.20-4.30 on revenue of $2.61-2.66B. Analysts were looking for an EPS of $4.30 on revenue of 2.67B.

The company also said it will be meeting with analysts and investors at the ICR Conference on Jan. 9-11, 2023.

Wedbush analysts cut the price target on the Outperform-rated LULU stock to $380 from the prior $430 per share. They labeled Lulu’s update as “disappointing.”

“Clearly, this isn’t ideal, and it shows a lack of visibility on gross margins (troubling amid elevated inventory levels, which were up mid-80’s YoY in both Q2 and Q3). As a result, we think investors might put this one in the “penalty box” for a while, particularly since we won’t hear from them again for a while (they are usually one of the last companies to full-report Q4 results, in late March),” the analysts told clients in a note.

Stifel analysts added:

“The report dampens the outlook for near-term earnings upside in 4Q22, though we believe the growth drivers are well intact, and reaffirm our positive view on the stock.”

Lulu stock is down over 10% in pre-open Monday.