Lululemon Athletica sees margin squeeze in holiday quarter; shares slump

3:39 pm Monday, January 09th, 2023

By Granth Vanaik

(Reuters) -Lululemon Athletica Inc forecast a decline in holiday-quarter gross margins on Monday as the apparel maker discounts more and grapples with higher costs, sending its shares down more than 9%.

Stubbornly high inflation and the threat of a recession in the United States have resulted in a shift in consumer spending away from discretionary products, forcing deeper discounts from apparel and sportswear companies to attract cash-strapped consumers.

High-end clothing companies such as Lululemon had fared relatively well for much of last year, but an 85% jump in the company’s inventory levels at the end of the third quarter showed that even affluent shoppers were pulling back on spending.

“Looking ahead we see dark clouds forming with difficult compares, peak margins, high inventory, and rising competition,” said Jefferies analyst Randal Konik, adding that the need for more discounts to get rid of excess stocks is likely to weigh on margins going forward.

Lululemon 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.

The company, 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.

Department store chain Macy’s Inc said on Monday it saw weakness in its sportswear and casual apparel business after the company on Friday projected fourth-quarter sales to come in at the lower end of its forecast.

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

(Reporting by Granth Vanaik in Bengaluru; Editing by Shailesh Kuber, Saumyadeb Chakrabarty and Shounak Dasgupta)