LULU drops 18% as guidance disappoints

Lululemon Athletica (LULU), the leading athletic wear company, reported better-than-expected earnings for its fiscal fourth quarter of 2023, highlighting its continued growth and strong performance. However, the stock experienced a significant decline in premarket trading following lower-than-anticipated guidance for the upcoming quarters. Shares of LULU are down 18%, hitting its lowest level since November. 

LULU reported earnings of $5.29 per share for its fiscal fourth quarter, which ended in January, surpassing analysts' expectations of $5 per share. Gross margin improved by 4.3 percentage points, while revenue of $3.2 billion was in line with expectations. 

Same-store sales grew by 12% year-over-year in the period, marking the 14th consecutive quarter of double-digit percentage growth. Fourth-quarter foot traffic increased 20% year-over-year, according to data from Placer.ai, trailing behind Nike's nearly 70% improvement.

Gross margin expanded by 200 basis points to 59.4%, primarily driven by improved product margins.

Despite this strong performance, Lululemon's stock has shed around 6% so far this year, following management issuing fourth-quarter guidance that fell short of analysts' expectations. Investors had been expecting more from a company that had seen its share price surge around 60% over the course of 2023. 

Concerns about rising competition in the athletic wear space and softening consumer spending also resurfaced. Robert Drbul, an analyst at Guggenheim, noted that while Americas grew 9% in the quarter, the management observed a shift in the US consumer behavior, amplified by a slower start to Q1.

Lululemon's guidance for fiscal 2024 did little to alleviate investors' fears. The company projected that diluted earnings per share would range between $14 and $14.20, below the consensus forecast for $14.33. Net revenue is expected to be between $10.7 billion and $10.8 billion, slightly below forecasts for $10.9 billion. 

Analysts at Needham maintained a Buy rating on the company but lowered their target price on the stock to $500 from $525, stating that while upside to estimates is needed for shares to perform well, 24 appears to be de-risked. 

Lululemon's CFO Meghan Frank emphasized the company's focus on driving the business forward and operating with agility and discipline, while acknowledging that there is still much growth potential ahead. 

Lululemon's long-term growth strategy, known as the Power of Three ×2 plan, aims to double the business from $6.25 billion in net revenue in 2021 to $12.5 billion by 2026. The company remains focused on expanding its international penetration and investing in brand-building events to drive increased awareness and customer acquisition.

In conclusion, while Lululemon Athletica Inc. reported strong earnings for its fiscal fourth quarter, concerns about competition and consumer spending weighed on its stock price and guidance for the future. Despite this, some analysts remain optimistic about the company's long-term growth prospects, particularly as it continues to innovate and respond to changing market trends.