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Lululemon earnings point towards ‘freight or supply chain issues’: Analyst

JJK Research Associates Janet Joseph Kloppenburg joins Yahoo Finance Live to discuss Lululemon's latest earnings report, the designer brand's operating margins and forward outlook, and the brand's pricing after the Black Friday shopping event.

Video transcript

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DAVE BRIGGS: All right, an earnings alert. Now shares of Lululemon. Check them out. Down 9 and 1/2 plus percent after reporting earnings. Yahoo Finance's Josh Schafer with us now to break down the numbers. Josh, what is moving the stock so far down?

JOSH SCHAFER: Yeah, Dave, it looks like right now, so you've got a revenue beat for Lululemon. The estimate was at $1.6 billion versus an estimate of $1.82 billion. And the diluted earnings per share beat the estimate as well at $2 versus an estimate of $1.97. But I think really what you're looking at here for what's bringing the stock down, is the fourth quarter guidance for EPS.

So Lulus guiding $4.20 to $4.30. Well, the Street was expecting $4.29. You can see that's a pretty big range there. Didn't quite hit it there. Now they did have full year revenue numbers coming in as well. That came in at $7.94 billion in a range to $7.99 billion. That was the high end of Lulus previous guidance. And similar their full year EPS guidance. That came in at $9.87 to $9.97. That's also higher than Lulu had previously guided.

And I will read you just a little nugget here, and we don't have the call yet, but CEO Calvin McDonald said that they're pleased with their early holiday season performance. Expect to hear a little bit more about that on the call. Obviously, the holiday season will include Q4, Dave, so will be interesting to see.

One other note too that I forgot for you. I think it was 85% inventories up year over year again. So another story there. That's the same as last quarter. Still may be a problem for them, it wasn't really last quarter, but we'll have to see.

DAVE BRIGGS: The inventory story continued to spread all over the retail sector. For more on the earnings, we're joined by Janet Joseph Kloppenburg of JJK Research Associates. Nice to see you. Your reaction to this report?

JANET JOSEPH KLOPPENBURG: Nice to see you as well.

DAVE BRIGGS: And why shares are down so far.

JANET JOSEPH KLOPPENBURG: Well, I disagree a little bit with the first commentator. I think the shares may be down because there was a gross margin missed in the third quarter. And we thought that gross margins would be within guidance, down 50% to 70%, and they were actually down 130 basis points.

The CFO Meghan's comments that we're operating quote, "in a dynamic environment," which may imply that there was some freight or supply chain issues. I don't think it's a markdown issue, but that's always a possibility. And so the operating margin came in at about 19% versus 19.4%. The guidance were for them to come in at 18.9%, 18.7% to 18.9%.

So a good beat on sales, which helped to leverage the SGA more than we would have expected. So we're happy with that. And the EPS came in at $2 bucks versus the street at $1.96. I think maybe the whisper might have been a little bit higher, because we all knew that the top line had good momentum.

Also, looking forward, the company brought revenue guidance in line with the street at the high end of guidance in line with the street. And also, EPS at 4.30 at the high end of guidance for fourth quarter versus the street at 4.29.

So a smaller raise than expected, but the full year is up close to $10 and I think that all in all, there's probably some aberration that impacted the gross margin in the third quarter that maybe continuing into the fourth quarter, and therefore, didn't allow the upside for the third quarter that the street was expecting and a lift to fourth quarter as high as maybe people were expecting. I think we'll learn more as the company talks.

JOSH SCHAFER: Right.

JANET JOSEPH KLOPPENBURG: But I was encouraged by the CEO saying that the fourth quarter began on a good note.

JOSH SCHAFER: And Janet, I want to ask you a little bit about inventory, the second straight quarter that we've seen a pretty high number there for Lulu, up 85% year over year. What do you make of that number? Do you see it as impactful moving forward?

JANET JOSEPH KLOPPENBURG: So the street's been concerned about Lulus' inventories all year. Clearly in those second quarter transcript, they said that there was second quarter ending plus 85% inventory would be up at least that level, if not higher coming out of the third quarter.

So they were up 85%, which was at the lower end of what they were guiding to. And that's because the company brought forth a huge amount of holiday products early to make sure that they were ready for the strong demand, which we're witnessing here with their sales up 28% in the third quarter. And that by the end of the year, they well, this is what they said three months ago, that they expected inventory to be up more like 50% to 60%.

So I think we're going to hear the CFO tell us that the inventories are exactly where they expected them to be. They're certainly in line with guidance. And that by the end of the year, we're going to see a markedly lower level of inventory. That should calm people down, but I was expecting a very high inventory number.

DAVE BRIGGS: What's your read on Black Friday? Look, most have been dramatically marking down products. Has rarely, if ever, been the case for Lululemon. And just following up on your comments about the earnings call, what primary question would you like answered?

JANET JOSEPH KLOPPENBURG: I think for me, well, it's a two-part question. First of all, I think on Black Friday, Lululemon was one of the winners. And there were a lot of great winners. I think brick and mortar traffic was terrific on Black Friday. There were a lot of promotions, but they weren't higher than they had been earlier in November.

And overall, I think that the promotional environment is in line with where we expected to be. And we're not seeing a dramatic slashing of pricing in the first 10 days of December. So I'm pretty happy with what I'm seeing. I think there's going to be clear winners and losers in the holiday period. Lulu is obviously in the winner camp.

As far as disappointment for Lulu goes, I am surprised by their gross margin for the third quarter. We've not seen this trend. And I'm sure the company will have a good explanation for it. And I think the stock will recover.

DAVE BRIGGS: They have proven awfully resilient over the last several years--

JANET JOSEPH KLOPPENBURG: They certainly have.

DAVE BRIGGS: --With maybe that notable exception of when the pandemic just struck. Janet Joseph Kloppenburg, we appreciate you. Josh Schafer, good to have you here as well. Thank you both.