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Lululemon’s Holiday Forecast Has Wall Street Worried

Wall Street had high expectations for Lululemon Athletica Inc., and while third quarter results on Wednesday were better than expected, it was the guidance for the holiday selling season that didn’t fare well with investors.

In a Nutshell: Wall Street’s high hopes for a solid holiday selling season in the fourth quarter were dashed when Lululemon’s profit guidance began at 3 cents below analysts’ consensus estimate of $2.13 a share. And that’s not to say that the yoga apparel maker’s fourth quarter forecast meant a lower full-year outlook–Lululemon actually raised its forecast for fiscal 2019.

The problem: Wall Street was expecting a higher growth rate. The company reported earnings after the equity markets closed, and shares of Lululemon fell 4.4 percent to $223 in early after-market trading.

Lululemon continues to see strong momentum on multiple fronts, including double digit growth in both men’s and women’s categories in the third quarter. Lululemon’s Power of Three metric–product innovation, omni guest experiences and market expansion–all saw gains in the quarter. For product innovation, men’s revenue was up 38 percent and women’s, up 20 percent. In omni guest experiences, digital revenue rose 30 percent and comparable store sales grew 11 percent. And in market expansion, international revenue increased 35 percent, while North American revenue climbed 21 percent.

In the Asia Pacific region, Lululemon‘s e-commerce business in China grew more than 60 percent in the quarter acquired over 30,000 new guests in China during the same period, the company said.

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Net Sales: For the three months ended Nov. 3, net revenue was up 22.5 percent to $916.1 million from $747.7 million. Total comparable sales rose 16 percent, while comparable store sales increased 10 percent as direct-to-consumer net revenue rose 29 percent.

Gross profit in the quarter was $505.0 million, representing a 24 percent gain from the year-ago period. The quarter also saw gross margin at 55.1 percent, an increase of 70 basis points versus a year ago.

Earnings: Net income for the quarter jumped 33.4 percent to $126 million, or 96 cents a diluted share, from $94.4 million, or 71 cents, in the year-ago quarter.

Wall Street was expecting earnings of 93 cents a diluted share on revenues of $899.7 million.

For the fourth quarter, the company guided diluted EPS to a range of $2.10 to $2.13, on revenue estimates at between $1.32 billion to $1.33 billion. That guidance is lower than Wall Street’s current expectations of $2.13 a share on revenue of $1.32 billion.

For full fiscal 2019, Lululemon is projecting earnings between $4.75 to $4.78 a share, on net revenue between $3.90 billion to $3.91 billion. That’s up from prior guidance of $4.63 to $4.70 a share on revenue guidance of $3.80 billion to $3.84 billion, and compares with Wall Street’s estimate of $4.75 a share on revenue of $3.89 billion.

CEO’s Take: “We’re proud of the continued momentum in our business as we [continue] our vision to be an experiential brand. We are successfully executing on our Power of Three growth plan as we create authentic connections with new and existing guests around the world,” CEO Calvin McDonald said.