Does Lululemon’s 12% Show Bad News for Apparel Retailers?

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Is Lululemon's 12% Bad News for Apparel Retailers?Is Lululemon's 12% Bad News for Apparel Retailers?Luxury sportswear retailer Lululemon Athletica Inc. (NASDAQ: LULU ) It traded 12% lower mid-session on Friday. The move followed the company’s warning of higher-than-expected inventory levels.

In an era of inflation and remaining supply chain issues, does Lululemon pose problems for apparel retailers?

Other clothing retailers like Levi Strauss & Co. (NYSE: LEVI ), American Eagle Outfitters Inc. (NYSE: AEO ), Gap Inc. (NYSE: GPS ) And Nike (NYSE: NKE ) They said inventories increased last quarter compared to a year ago.

However, as a group, apparel retailers outperformed most stocks thanks to strong price performance from companies including Lululemon and fellow large-caps. Ross Stores Inc. (NASDAQ: ROST ) And TJX Companies Inc. (NYSE: TJX ).

Topping last year’s tally

At first glance, Lululemon’s quarterly numbers look pretty good.

After Thursday’s bell, the Vancouver, British Columbia-based company said third-quarter revenue was $1.86 billion, a 28% year-over-year increase. Revenue was $2, up 23% from the prior-year quarter.

Those results win both top- and bottom-line views. MarketBeat earnings data That shows Lululemon has a solid history of beating or at least meeting analysts’ expectations.

But the holiday cheer soon turned sour with the company’s hint of high inventory levels. It saw shares slide in after-hours trading and fell higher at the open Friday.

While same-store sales, a common retail measure, rose in the quarter, they fell below Wall Street’s expectations.

Holds above the 200-day line

Even with Friday’s price drop that cut through the 50-day moving average, shares remained above the long-term 200-day line. If it does, it’s a signal that institutional investors are still bullish on the stock and aren’t bailing out en masse.

Of course, the news is mixed. The company increased its earnings and revenue guidance. It now sees sales in a range of $7.944 billion to $7.994 billion.

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

Still, investors weren’t ready to look on the bright side on Friday. There is a case that Thursday’s report gave some investors reason to take profits. Shares have gained 4.01% over the past month and 8.31% over the past three months.

The stock has been trending near its 10-day moving average since it hit a structure high of $370.46 on Nov. 11. That represented the most recent technical buy point, but Friday’s move put the stock 12% below that point.
Is Lululemon's 12% Bad News for Apparel Retailers?

Widespread cargo glut

The increase in inventories has worried investors.

This is not a problem unique to Lululemon. For most of this year, retailers across categories have reported higher inventories due to rapidly changing consumer buying habits at various stages of the pandemic. Despite offering deep discounts, some products are not moving off the shelves as fast as companies had hoped based on previous buying patterns.

Supply chain and inventory delays compounded the problem. High-demand products took a long time to arrive, and when they did, consumers were not interested.

For their part, Lululemon’s management team maintains that current demand justifies higher inventory levels, rather than necessitating steep markups.

The company has a history of charging full price more than offering discounts. Some analysts believe the company will be able to maintain its pricing power MarketBeat analyst data for LululemonThat shows four analysts raised their price targets after the third-quarter report.

Analysts’ consensus price target for Lululemon is $413.12, a potential upside of 26.30%. This is above the price target of $400.74 a month ago.

Although apparel retailers as a group fell on Friday, one day does not create a trend. Holiday-season and fourth-quarter sales will reveal more about the medium-term effects of changing buying habits and inventory gluts.

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