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Lululemon Shares Drop After Weak Q4 Guidance

Lululemon shares fell on Monday after the athleisure player gave a disappointing update to its fourth quarter outlook at the ICR conference.

The Vancouver, British Columbia-based brand now projects Q4 net revenue to be between $2.660 billion to $2.700 billion, compared to a previously outlined range of $2.605 billion and $2.655 billion. Q4 diluted earnings per share are expected to be between $4.22 and $4.27, tighter and lower than the previously outlined range of $4.20 and $4.30. Gross margin in Q4 is expected to decline between 90 and 110 basis points.

Other major footwear brands and retailers have announced updated sales and earnings expectations ahead of their presentations at the 25th annual ICR conference, which begins today and runs through Wednesday. Genesco, Boot Barn and Macy’s have also pre-announced expectations for Q4, with more slated to provide updates through the conference.

Shares of Lululemon were down more than 9% when markets closed on Monday.

Lululemon CEO Calvin McDonald said the company continues to operate in a “dynamic macro-backdrop” though said traffic in digital and stores was strong throughout the fourth quarter.

“We anticipate delivering another quarter of solid earnings growth consistent with our updated EPS forecast,” McDonald said.

Lululemon in December also outlined a lower-than-expected outlook for the holiday season, as consumers across the board feel the impact of inflation. While Lululemon typically caters to higher-income shoppers that have been less impacted overall by inflationary pressures, the company is still operating in a “challenging” external environment, McDonald said last month.

Despite the downgrade, Lululemon is still “a clear holiday winner in terms of sales,” said Neil Saunders, managing director of GlobalData, in a comment. The company’s updated guidance reveals pressure on its gross margins due to an increase in discounting to clear through excess inventory as well as unfavorable foreign exchange rates impacting the brand’s growth overseas. But sales and brand momentum remain strong.

“With steps having been taken to reduce costs, we see the margin compression as more of a blip than a worrying trend,” Saunders said.

At the same time, Lululemon’s margin pressure is less worrisome when compared to its athletic apparel peers like Nike, Adidas and Under Armour, Wedbush analyst Tom Nikic pointed out in a Monday note.

“For all the hand-wringing over gross margin, they’re still growing EPS [in the mid-20% range] year over year,” Nikic wrote.

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