Lululemon Athletica Inc. shares had the biggest gain since March 2020 after the company gave an annual outlook that surpassed analysts’ expectations, driven by high demand for activewear, even as it deals with nagging inventory issues that ate into margins.
(Bloomberg) — Lululemon Athletica Inc. shares had the biggest gain since March 2020 after the company gave an annual outlook that surpassed analysts’ expectations, driven by high demand for activewear, even as it deals with nagging inventory issues that ate into margins.
The stock rose as much as 16% in New York trading Wednesday.
The retailer expects full-year sales to grow about 15% to a range of $9.3 billion to $9.41 billion, ahead of the $9.1 billion analyst estimate compiled by Bloomberg. Global sales rose 30% in the fiscal fourth quarter, spurred by strong sales in both North America and abroad. Profit also exceeded expectations.
Lululemon has worked to reduce an inventory pileup that has troubled operations in recent quarters, but levels remain high, up 50% from the year prior. Cost pressures are moderating, however. Adjusted gross margin fell 70 basis points in the quarter after a January forecast for a decline of as many as 110 basis points. The decline in adjusted gross margin was 150 basis points for the year.
“After missing gross margin guidance in Q3 and lowering the Q4 margin outlook,” Wedbush analyst Tom Nikic wrote in a note to clients, “there was significant investor concern” ahead of the earnings report. “Fortunately, LULU likely alleviated many of these concerns.”
“Our inventory growth will continue to moderate,” Chief Financial Officer Meghan Frank said on the earnings call. “We expect to realize significant gross margin expansion driven by lower air freight.”
Lululemon isn’t alone in the battle against high inventory levels and margin declines. Nike Inc. also discussed the margin pressure it’s under as it liquidates merchandise during its most recent earnings announcement.
Lululemon management has ramped up store openings across regions as it seeks out more growth, adding 81 locations to reach more than 600 shops this year.
Chief Executive Officer Calvin McDonald is looking to double Lululemon’s sales to $12.5 billion in a five-year plan set to end in 2026. Executives are focused on growing international operations, direct-to-consumer channels and the menswear business.
The retailer is making strides in categories outside of its core workout gear with items like jackets, wrote Neil Saunders, managing director at GlobalData Retail.
“Despite a long period of stellar growth, Lululemon’s outlook remains solid,” Saunders said in a note.
(Updates shares starting in first paragraph, industry margin detail in seventh paragraph. An earlier version corrected the annual forecast.)
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