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- Lululemon relied on heavy promotional activity to clear 85% higher inventory during the holidays.
- At the ICR conference, Lululemon said it now expects gross margin to be down 90-110 basis points.
- Wall Street is now questioning its efforts outside of apparel, including in sneakers and fitness.
Lululemon says it expects to make less despite rising revenues in the fourth quarter after heavily discounting merchandise over the holiday season.
At the ICR conference Monday, Lululemon said it now expects gross margin to be down 90-110 basis points, compared to small gains expected late last year. Overall sales, which were revised up, should increase by around 27% to $2.7 billion, the company said.
The guidance on margins has some analysts questioning how Lululemon’s ambitions outside of its main apparel business are impacting its bottom line. In recent years the company has moved into sneakers and bought at-home fitness company Mirror for $500 million in the summer of 2020.
“Lulu’s clearly a strong brand with a strong Wall Street fan base (count us in it), but we fear brand saturation questions are becoming hard to ignore,” BMO Capital markets analyst Simeon Siegel wrote in a note Monday.
“Should we applaud attempts to grab new customers or ask whether they are hitting brand saturation, which is generally followed by dilution on stretched revenues, leading early adopters to new emerging brands?” he added.
Jefferies analysts said that Mirror continues to be a “drag” on Lululemon earnings and that the company is likely seeing less adoption than anticipated for the at-home fitness mirror. According to the firm, visits in November to Mirror’s website declined 55% year-over-year ahead of the all-important holiday season.
Lululemon does not break out Mirror sales in quarterly earnings. But in its third-quarter earnings call, CEO Calvin McDonald said the retailer is pleased with consumers’ early response to Mirror after it was rolled into the company’s new Lululemon Studio subscription offering.
“Our data suggests that at-home fitness trends continue to demonstrate weakness while gym trends have been improving,” Jefferies said. “Meanwhile, the company’s relatively recent launch into footwear does not appear to be doing well, with some styles on sale by >30% during Black Friday.”
In recent years Lululemon has moved into sneakers.
Lululemon’s excess inventory
Lululemon reported 85% increases in inventory levels in both Q2 and Q3 compared to the year prior. Markdowns were the strategy of choice in clearing that out for the company, as well as peers like Nike, Adidas, and Under Armour.
The strategy, however, does weigh on profits. Jeffries said 41% of items at Lululemon were on sale in November. Lululemon Chief Financial Officer Meghan Frank told analysts in early December that the company expected promotional activity to be in line with 2019 levels.
“We have had ongoing concerns that this was not sustainable and that LULU’s sales and margins were at a crossroads. If markdowns are worse than 2019 levels, that would represent an inflection in trend,” Siegel said.
Still, Wedbush Securities Analyst Tom Nikic said margin pressure on Lululemon is modest compared to direct rivals. Adidas, as an example, expects gross margin to be down 900 basis points following its split from Ye, he wrote in a note Monday.
“Inventory growth has likely peaked, which should alleviate gross margin pressure in FY23,” he said.
McDonald remains positive despite inventory and margin concerns casting doubt over the company.
“We are pleased with our continued revenue growth and momentum in the business as our teams navigate a dynamic macro-backdrop,” he said in a statement about the guidance. Both physical and digital traffic remained strong in Q4, he said.
Lululemon shares are down 8.3% today compared to Friday’s close.