Tuesday's Market Minute: Lululemon's Stretched Expectations Into 2Q Report Thursday

In a quick two decades, Lululemon LULU has transformed itself from a standalone Canadian yoga store to one of the world’s most recognized fitness brands with its well-loved omega-resembling logo depicting all that is trendy in the apparel industry. During the five-year period from 2016 through fiscal 2021, the retailer increased its revenue at a compound annual growth rate of 21.8% and profit by 28%. Shares have consequentially risen, surging 428% within that time frame. But so far this quarter, overall retail enthusiasm has dissipated, and investors have quickly turned skeptical on companies’ ability to turn over their inventory. This has set a shakier tone ahead of Lululemon’s second quarter earnings on Thursday.

Shares of Lululemon were downgraded to sell by Jefferies to start the week, with the analyst calling for the company to dial back its aggressive long-term guidance in the coming quarters. 

In a note to clients, the firm said “Our downgrade thesis is based on a view that long-term projections are aggressive across total revenue, EBIT margins, men’s, and international. We believe in the coming quarters, LULU will have to walk back its long-term projections as competition rises, end markets weaken, and promos increase industry-wide.” 

This growth plan was announced back in April and called for Lululemon to double its 2021 revenue by 2026 through growing its men’s segment and digital sales and quadrupling its international revenue. The chain now has 71 stores in China and announced it was entering Spain last month, with plans to tackle the market in Italy in the next 12 months.

But this second quarter report comes on the back of a stronger-than-expected 1Q print and the stock in a decent recovery, well off its 52-week low of $251.51 in May. Last quarter, revenue rose an outsized 32% Y/Y on an adjusted profit that increased 28% from a year ago. This puts shares priced at a premium, especially given its resiliency (so far) to macro headwinds this summer. Still, as of Monday’s close, shares are down almost 23% YTD, and the stock fell about 1% to start the week.

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