Lululemon Athletica shares slump as company sees margin squeeze in holiday quarter

Lululemon Athletica Inc LULU-Q forecast a decline in holiday-quarter gross margins on Monday as the apparel maker discounts more and grapples with higher costs, sending its shares down more than 9 per cent.

Stubbornly high inflation and the threat of a recession in the United States have resulted in a shift in consumer spending away from discretionary products, forcing deeper discounts from apparel and sportswear companies to attract cash-strapped consumers.

High-end clothing companies such as Lululemon had fared relatively well for much of last year, but an 85-per-cent jump in the company’s inventory levels at the end of the third quarter showed that even affluent shoppers were pulling back on spending.

“Looking ahead we see dark clouds forming with difficult compares, peak margins, high inventory and rising competition,” Jefferies analyst Randal Konik said, adding that the need for more discounts to get rid of excess stock is likely to weigh on margins going forward.

Lululemon said it expects gross margin to decline 90 to 110 basis points in the fourth quarter, compared with its previous expectation of an increase of 10 to 20 basis points.

The company, however, raised its fourth-quarter net revenue forecast to between US$2.66-billion and US$2.70-billion, from its previous range of US$2.61-billion to US$2.66-billion.

It also tightened its outlook for fourth-quarter earnings per share to between US$4.22 and US$4.27, compared with its prior forecast of US$4.20 to US$4.30.

Department store chain Macy’s Inc. said on Monday it saw weakness in its sportswear and casual apparel business after the company on Friday projected fourth-quarter sales to come in at the lower end of its forecast.

However, apparel retailers Abercrombie & Fitch Co. and American Eagle Outfitters Inc. issued upbeat holiday-quarter expectations on Monday, benefiting from strong demand across their brands.