Lululemon Stock Falls 9% as Profit Margins Contract
Company warns of drop in earnings, cites rising competition and high inventories as possible reasons
Lululemon Athletica Inc. (US:LULU) saw its shares fall by more than 9% on Monday after the company warned that its profit margins would decline in the quarter ending January 29 and set earnings targets below Wall Street expectations.
This news follows Macy's Inc. (US:M) cautioning that fourth-quarter sales would be at the low-to-midpoint of its guided range.
However, not all apparel chains struggled during the holiday season, with American Eagle Outfitters (US:AEO) and Abercrombie & Fitch (US:ANF) reporting better-than-expected fourth-quarter results.
Lululemon CEO Calvin McDonald stated that shopper visits remained strong in the fourth quarter across physical and digital channels but did not explain the contraction in profit margins.
Analysts are concerned that Lululemon's strong sales and profit gains may end due to rising competition and high inventories. The company is also facing difficulties with its acquisition of Mirror, which provides LCD screens for home gyms and online fitness classes.
"Decisions around pricing have allowed us to continue to deliver on the demand side that we're seeing as we continue to see new guest acquisition strong, and the pricing decisions to manage to price, to not move to price aggressively, has allowed us to continue to sell our regular price, not be forced into unnecessary markdowns or course correcting with a promotional play like we're seeing happen in the marketplace," McDonald said on a conference call after the earnings.
Despite raising revenue expectations, Lululemon warned of a drop in profit margins and now expects earnings for the final quarter of its fiscal year to be between $4.22 and $4.27 per share.