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Lululemon Stock Has Its Worst Day Since 2020. Some Analysts Say Buy the Dip.

Lululemon had a solid quarter, but investors appeared concerned about softer fourth-quarter projections.

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Taylor Glascock/Bloomberg

Investors have come to expect a lot from
Lululemon Athletica.
The company has been a solid performer over the last couple of quarters, bucking some of the negative trends afflicting the retail sector.

And indeed,
Lululemon
‘s (ticker: LULU) third-quarter report released Thursday wasn’t a bad one. The company’s earnings were in line with expectations and revenue beat forecasts. But investors were spooked when they saw gross margin compression and continued inventory challenges, coupled with a softer outlook than hoped for the fourth quarter.

That sent the shares plunging 12.5% to $327.64 on Friday, on pace for their largest percent decrease since March 2020. The
S&P 500
rose 0.3%.

For the fourth quarter, Lululemon is expecting net revenue between $2.605 billion and $2.655 billion, on the lower end of analysts’ estimates for $2.655 billion. The company predicts earnings per share to be between $4.20 and $4.30 next quarter, also on the lower end of estimates for $4.28.

“LULU’s a clearly powerful brand and, versus the rest of retail, this was a solid report, with strong revenue growth understandably offset by [gross margin] pressures,” wrote BMO Capital Markets’ Simeon Siegel. “However, LULU doesn’t trade like the rest of retail, and we fear early signs that costs to maintain industry-leading growth are increasing as the brand stretches past core loyalists, raising our concerns over future margin pressures.”

Lululelmon’s margins contracted 1.3 percentage points in the quarter due to a combination of foreign exchange pressures, product margin pressures, and fixed costs. Siegel says there could be more strain on margins ahead, especially because the company has yet to make significant strides in lowering its inventory levels. Inventory grew by 85% this quarter—the same as the previous quarter. If these inventory snafus continue, the company may be forced to ramp up its discounts, a step it has not yet been forced to take, he added, reiterating a Market Perform rating on the stock.

On Friday, Goldman Sachs removed Lululemon stock from its Conviction List, with analyst Brooke Roach arguing that the pace of comp growth will begin to slow into 2023 as a strong year full of innovation comes to an end.

“We believe accelerated growth and outperformance vs. the sector may be modestly harder to achieve,” Roach wrote.

Still, Roach reiterated a Buy rating on the stock and raised her price target to $431 from $383. She expects the company to keep gaining market share even amid a choppy macroeconomic environment, driven by a strong innovation pipeline and continued demand.

Piper Sandler’s Abbie Zvejnieks also boosted her price target following the earnings report to $390 from $350, and maintained an Overweight rating on the shares. The analyst believes that while the fourth-quarter guidance may have underwhelmed investors, the company is being “prudently conservative” given the uncertain environment. And even then, Lululemon remains well-positioned heading into the holiday and to capitalize on long-term growth opportunities, she added.

Wedbush analyst Tom Nikic agrees. Although the gross margin and inventory dynamics were less than ideal, he said he is still bullish on the company’s momentum, especially because much of its product is evergreen, thus requiring fewer seasonal markdowns.

“If the shares trade off on these dynamics, we’d view this as a ‘buy the dip’ opportunity in a high-quality name,” he wrote in a research note on Friday.

Following the earnings, 67% of analysts had a Buy rating on the stock, while 27% rated it a Hold and 6% a Sell.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

Credit: marketwatch.com

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