Lululemon Athletica (LULU) Expects To End FY22 On A Sour Note Due To Labor And Capacity Constraints
2:57 pm Monday, January 10th, 2022
Investors are turning sour on lululemon athletica (NASDAQ:LULU) today after the athletic apparel retailer announced that it expects to close out FY22 toward the lower end of its Q4 (Jan) guidance. This would translate to adjusted EPS of around $3.25 and revenue closer to $2.125 bln, coming in below consensus in both metrics. Although the stock has dropped by over 20% since late November as concerns brewed that Omicron would materially affect LULU moving forward, the updated guidance still comes as a bit of a shock, especially given the somewhat bullish tone that LULU’s adopted just one month ago.
As of December 9, LULU was pleased with its performance for the holiday season, noting during its Q3 (Nov) earnings call on that date that both its digital and physical channels were doing well; digital in particular was smashing records in certain metrics. However, given LULU’s updated Q4 guidance, things clearly began to turn quickly as the Omicron variant picked up, generating capacity constraints and limiting staff, which impacted operating hours.
Given LULU’s optimism surrounding staff availability as detailed during its Q3 earnings call, that staffing issues contributed to the downside Q4 guidance comes as quite a surprise. As of early December, LULU noted that its staff levels were well-positioned for the holiday season; it had taken on an additional 7,000 employees just to meet demand.
Meanwhile, some of the capacity constraints may already have been mostly priced in. For example, in Q3, LULU expected airfreight costs to impact gross margins by about 450 bps for the year, up 250 bps from the prior quarter.
However, the possibility that these constraints could be continuing into Q1 (Apr) could be putting additional strain on the stock today. Although LULU’s factories in Vietnam were reopened in Q3, they were not operating at full tilt. Numerous apparel and home goods retailers, such as NIKE (NKE) and Williams-Sonoma (WSM), also have significant exposure in Vietnam. Therefore, while LULU is not diving into further details, it is evident that a full recovery may take several months, most likely pointing to the end of March 2022.
The main takeaway is that today’s pronounced sell-off results from a worst-case scenario regarding LULU’s Q4 guidance range, which could be setting up the company for further downside going forward. For example, Omicron is still causing a spike in COVID-19 cases, which could impact labor throughout the winter, especially when coinciding with an annual flu season. Also, as Vietnam factories continue to ramp up production, capacity constraints may continue to pressure margins in Q1.
Finally, when adding these headwinds to LULU’s underperforming MIRROR segment, for which the company already cut its sales guidance in half, shares may continue to be under fire for the near term. Perhaps magnifying the selling pressure, LULU also trades at a one-year forward P/E ratio of 38x, a premium compared to NKE at 32x and Under Armour (UAA) at 21x and a fairly high multiple during a period of rising interest rates.
