Lululemon Athletica sees margin squeeze in holiday quarter; shares slump By Reuters

By Granth Vanaik

(Reuters) -Lululemon Athletica Inc said on Monday it expects holiday-quarter gross margins to decline as the apparel maker grapples with increased costs amid a drop in consumer spending due to stubbornly high inflation.

The yoga pant maker’s shares fell about 10% to $296.40 in premarket trading.

A sharp rise in inventory levels has forced several retailers to offer discounts and mark down prices to clear excess stock, a move that has dented margins across the apparel sector.

“Our concern with Lululemon, despite how strong they have been performing in recent quarters, has been the amount of inventory that they have,” said Jane Hali and Associates analyst Jessica Ramirez, adding that excess inventories is where the issue with gross margin is stemming from.

Lululemon’s inventories at the end of the third quarter rose 85% to $1.7 billion.

The company said it expects gross margin to decline 90-110 basis points in the fourth quarter, compared with its previous expectation of an increase of 10-20 basis points, with William Blair analyst Sharon Zackfia calling the margin pressure “unexpected”.

Lululemon, however, raised its fourth-quarter net revenue forecast to between $2.66 billion and $2.70 billion, from its previous range of $2.61 billion to $2.66 billion.

It also tightened its outlook for fourth-quarter earnings per share to between $4.22 and $4.27, compared with its prior forecast of $4.20 to $4.30.

In contrast, apparel retailers Abercrombie & Fitch Co and American Eagle Outfitters (NYSE:) Inc issued upbeat holiday-quarter expectations on Monday, benefiting from strong demand across their brands.