Why This Investor Sold Lululemon Stock Following Target's Earnings

Virtus Investment Partners' Joe Terranova has been slashing positions from his portfolio this week, but he decided to hold Lululemon Athletica Inc LULU through Target Corp's TGT earnings.

"I said they better not miss, otherwise we have a problem. Well, we have a problem now," Terranova said Wednesday on CNBC's "Fast Money Halftime Report."

What Happened: Target said first-quarter revenue increased 4% year-over-year to $25.17 billion, which beat the $24.37-billion estimate, according to data from Benzinga Pro. However, the retailer reported quarterly earnings of $2.19 per share, which came in well below the estimate of $3.07 per share. 

Operating income margin rate also came in well below expectations at 5.3% in the first quarter, compared with 9.8% in 2021. Target said it was primarily driven by gross margin pressure reflecting actions to reduce excess inventory as well as higher freight and transportation costs.

Related Link: 'We Faced Unexpectedly High Costs': Why Target Shares Are Falling Today

Why It Matters: Terranova was expecting an extended bear market bounce off the lows after stocks were trampled over the last month or so. He told CNBC that Target's quarterly results are "completely negating that bear market bounce."

"Now I have to worry about margin compression," Terranova said. 

It seems companies are failing to pass through rising inflation costs, he stressed. That doesn't bode well for Lululemon, he added. 

Terranova noted that he bought Lululemon shares around $313 in February and decided to completely cut his position Wednesday morning. He expects the athleisure company to report many of the same challenges that are pressuring retail stocks today. 

Terranova also noted that Lululemon no longer looks attractive from a technical perspective.

See Also: Where Lululemon Athletica Stands With Analysts

LULU Price Action: Lululemon shares are making new 52-week lows on Wednesday.

According to data from Benzinga Pro, the stock was down 10.62% at $273.09 at press time.

Photo: ajay_suresh from Flickr.