Is Lululemon’s 12% signal bad news for apparel retailers?

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



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Is Lululemon a harbinger of trouble ahead for apparel retailers, at a time of inflation and remaining supply chain issues?

Other clothing retailers, such as Levi Strauss & Co. (NYSE: LEVI), American Eagle Outfitters Inc. (NYSE: AEO), Gap Inc. (NYSE: GPS) and Nike (NYSE: NKE ) has said that inventory increased in the last quarter, compared to a year ago.

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

Tops last year’s figures

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

After hours Thursday, the Vancouver, British Columbia-based company said third-quarter revenue came in at $1.86 billion, up 28% year over year. Earnings were $2, up 23% over the previous quarter.

These results beat both 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 holiday cheer was quickly soured by the company’s mention of higher inventory levels. This caused the shares to slide in after-market trading and plunged in large volumes on the open Friday.

While same-store sales, a standard retail business, rose in the quarter, they fell short of Wall Street’s expectations.

Holding above the 200-day line

Even with Friday’s drop, which sliced ​​through the 50-day moving average, shares remained above the long-term 200-day line. If it holds, it is a signal that institutional investors still have conviction about the stock and are not bailing out en masse.

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

It expects net income between $9.87 to $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 bright side Friday. There is a case to be made that Thursday’s report gave some investors a reason to take profits. Shares have risen 4.01% in the past month and 8.31% in the past three months.

The stock has been trending near its 10-day moving average since rising to a structural high of $370.46 on November 11. That represented the latest technical buy point, but Friday’s action put the stock about 12% below that point.
Does Lululemon's 12% Signal Drop Bad News for Apparel Retailers?

Widespread Inventory Glut

The increase in inventories worried investors.

It’s not a problem unique to Lululemon. For much of this year, retailers across categories have reported higher inventories due to rapidly changing consumer buying habits throughout the various phases of the pandemic. Despite offering deep discounts, some items are not moving off the shelves as quickly as the companies had expected, based on past buying patterns.

Delays in the supply chain and shipping complicated the problem. Items with high demand took a long time to appear, and once they were available, consumers were no longer interested.

For its part, Lululemon’s management team maintains that ongoing demand will justify high inventory levels, rather than necessitating steep declines.

The company has a history of charging full price rather than offering discounts. Some analysts appear to have confidence that the company can maintain its pricing power, as evidenced by MarketBeat analyst data for Lululemon, which shows that 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%. That’s up from a price target of $400.74 a month ago.

Although apparel retailers as a group fell on Friday, it is not a day that constitutes a trend. Sales during the holiday season and the fourth quarter will reveal much more about changing buying habits and the medium-term effects of excess inventory.

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