An analyst says that Thursday’s second-quarter sales miss from Lululemon Athletica Inc. may lead to an opportunity for investors to buy the dip as the company’s stock wobbles post-earnings.
The Vancouver-based athleisure retailer lowered its guidance Thursday for the upcoming year after missing Wall Street expectations on profit for the first time in more than two years.
David Swartz, senior equity analyst of consumer equity research and investment research at Morningstar, told BNN Bloomberg in a Friday interview that Lululemon’s lowered forecast comes amid weakness in its North American retail segment, particularly its women’s business.
“Lululemon has not had as much new product and new colours and styles this year … it’s just been sort of a lull in new products that I think is affecting Lululemon right now,” he said.
“I think a lot of people are surprised that sales had slowed in North America, but I’d always assumed that it would happen. Lululemon could not have realistically kept up those historical growth rates forever.”
Swartz said much of Lululemon’s growth in the second quarter came from international markets like China. He added that he expects the company to continue diversifying its international business over time.
‘A bit of a style change’
Swartz explained that changing style preferences may have also impacted Lululemon sales in the second quarter, as many consumers opted for baggier pants rather than the retailer’s signature skin-tight leggings.
“We have seen a bit of a style change this year. A lot of women now are more interested I think in pants that maybe are not so tight,” he said.
“We are seeing a resurgence in denim this year, too, which isn’t great for Lululemon either.”
Despite these challenges, Swartz said that the women’s athleisure market is still growing worldwide, and Lululemon is planning the release of a number of new products in a wider variety of styles.
“Some of these news products may not really hit the stores until 2025, but this is a company that I think still follows trends really well,” he added.
“It has been a bit of a down period this year but that’s going to happen in the apparel retail industry.”
‘Buying opportunity’
Swartz said that the good news from Thursday’s earnings release was that despite the miss on sales and revenue, Lululemon’s gross and operating margins remained strong.
“It looks like Lululemon I think sacrificed some sales to preserve its margins,” he said.
“There was a lot of discounting, there was a lot of concern that discounting was going to affect Lululemon’s profitability but that didn’t really happen yesterday.”
Swartz said that he believes the stock, which was changing hands at around US$260 per share in midday trading Friday, remains attractively priced for retail investors, considering it reached more than $500 late last year.
“I think it could be trading closer to $300 over time as people recognize that this down period we’re in right now won’t last that long,” he said.
“So ,I do think that this may actually be a buying opportunity for people that are looking to invest in Lululemon.”
