January 27, 2023

Does Lululemons 12% Drop Signal Bad News For Apparel Retailers?

Retailer of luxury sportswear Lululemon Athletica Inc. (NASDAQ:LULU) traded 12% lower mid-session on Friday, following a gap in the open. The move followed the company’s warning of higher-than-expected inventory levels.

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Is Lululemon a harbinger of future troubles for apparel retailers, in an era of inflation and ongoing supply chain problems?

Other clothing retailers, such as Levi Strauss & Co. (NYSE: LEVI), American Eagle Outfitters Inc. (NYSE: AEO), Gap Inc. (NYSE:GPS) and Nike (NYSE: NKE) have said inventories were higher in the quarter than a year ago.

However, as a group, apparel retailers have outperformed the vast majority of stocks, led by strong price performance from companies like Lululemon and other large caps Ross Stores Inc. (NASDAQ: ROST) and The TJX Companies Inc. (NYSE: TJX).

Exceeds last year’s figures

On the surface, Lululemon’s quarterly earnings look pretty good.

After the clock on Thursday, the Vancouver, British Columbia-based company said its third-quarter revenue was $1.86 billion, up 28% year-over-year. Earnings were $2, up 23% from the same quarter last year.

Those results beat both the top and bottom line views. MarketBeat earnings data shows that Lululemon has a solid history of beating, or at least meeting, analyst expectations.

But the revelry was quickly soured by the company’s statement of higher inventory levels. That caused the stock to slip in after-hours trading and plummet in heavy volume on Friday open.

While same-store sales, a commonly used retail metric, increased in the quarter, they fell below Wall Street expectations.

Holding above the 200 day line

Even with Friday’s price drop cutting through the 50-day moving average, stocks remained above the longer-term 200-day line. If so, it is a signal that institutional investors are still convinced of the stock and are not going to save en masse.

Sure, the news was mixed. The company raised its sales and profit expectations. It now sees revenue in the range of $7.944 billion to $7.994 billion for the full year, up from a previous forecast of a range of $7.865 billion to $7.940 billion.

It expects net income between $9.87 and $9.97 per share, better than a previous forecast of $9.82 to $9.90 per share.

Still, investors weren’t ready to look on the upside on Friday. It is likely that Thursday’s report gave some investors a reason to take profits. Shares are up 4.01% over the past month and 8.31% over the past three months.

The stock has been moving near its 10-day moving average since rising to a structure high of $370.46 on Nov. 11. That represented the most recent technical buy point, but Friday’s action put the stock about 12% below that point.
Does Lululemons 12% Drop Signal Bad News For Apparel Retailers?

Widespread inventory abundance

The rise in inventories worried investors.

It’s not a problem unique to Lululemon. For much of this year, retailers in several categories have reported higher inventories due to rapidly changing consumer buying habits during the different phases of the pandemic. Despite offering deep discounts, some items aren’t coming off the shelves as quickly as companies expected, based on past buying patterns.

Delays in the supply chain and freight complicated the problem. Popular items took a long time to arrive and once they became available, consumers were no longer interested.

Lululemon’s management team, for its part, maintains that sustained demand will justify high inventory levels, rather than requiring massive price reductions.

The company has a history of charging full price, more than offering discounts. Some analysts seem confident that the company can maintain its pricing power, as evidenced by data from MarketBeat analysts for Lululemon, which shows four analysts raised their price targets after the third-quarter report.

The analyst consensus price target for Lululemon is $413.12, a potential increase of 26.30%. That’s higher than the $400.74 price target a month ago.

Although clothing retailers went down as a group on Friday, a day doesn’t make a trend. Holiday and Q4 sales will reveal much more about changing buying habits and the medium-term effects of inventory oversupply.

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