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The Ratings Game: Lululemon stock posts double-digit percentage loss on lower gross-margin view

Yoga clothing maker Lululemon ups revenue outlook but now expects gross margins to fall rather than rise as stock dips by roughly 10%. Read More...

Lululemon Athletica Inc. stock fell by more than 10% on Monday after the yoga clothing maker said it will fall short of Wall Street’s earnings projections as its gross margins drop instead of rise.

Lululemon LULU, -9.19% said it’s now forecasting fourth-quarter earnings of $4.22 to $4.27 a share, compared with prior estimates of $4.20 to $4.30 a share.

Lululemon stock fell 10.3%.

At the top end of its revised range, Lululemon will fall 2 cents short of the Wall Street consensus expectation of $4.29 a share, according to estimates compiled by FactSet.

“Looking ahead we see dark clouds forming with difficult compares, peak margins, high inventory, and rising competition,” Jefferies analyst Randal J. Konik said in a research note. “Elevated promotional activity and markdown risk is likely to weigh on margins going forward.”

Konik reiterated an underperform rating on the stock.

Lululemon said gross margins in the fourth quarter will drop by 90 basis points to 110 basis points, compared with prior guidance of a rise of 10 to 20 basis points.

The clothing company will report its results on March 28, according to FactSet data.

On the plus side, Lululemon increased its revenue outlook to $2.66 billion to $2.7 billion, up from its earlier view of $2.605 billion to $2.655 billion. Wall Street analysts currently expect fourth-quarter revenue of $2.69 billion, according to estimated compiled by FactSet.

Lululemon now expects it will further leverage selling, general and administrative expenses by 100 to 120 basis points, compared with its previous expectation of 30 to 50 basis points of leverage.

Prior to Monday’s trades, Lululemon is down 7% in the last 12 months through Friday’s close, while the S&P 500  SPX, +1.29% has lost about 17%.

Stifel analyst Jim Duffy reiterated a buy rating on Lululemon.

“Revenue upside is validation of brand momentum, though the lowered gross-margin outlook suggests influence of the broader promotional environment,” Duffy said. “The report dampens the outlook for near-term earnings upside in [the fourth quarter of 2022], though we believe the growth drivers are well intact and reaffirm our positive view on the stock.”

Wedbush analyst Tom Nikic said the gross-margin projection from Lululemon is disappointing but added that revenue trends remain “very strong” and the brand has strong momentum. In addition, he said, the gross-margin pressure Lululemon is seeing is “fairly modest” relative to its peers.

He reiterated an outperform rating on the stock.

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