Lululemon's $98 Yoga Pants Face Baggier Fashions, More Rivals
(Bloomberg) -- Lululemon Athletica Inc. lowered its sales and profit outlook for the year as increased competition and relentless inflation curb demand for its pricey yoga pants.
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The company now sees sales of as much as $10.48 billion this year, down from the previous view of as much as $10.8 billion, offered in early June. Chief Financial Officer Meghan Frank said the cut was due to “uncertainties” in the economy, including a shorter holiday season and the upcoming US elections.
Sales growth in North America is slowing as shoppers contend with inflation, higher interest rates and a cooling job market. Shopper preferences are also moving toward styles that are looser than the leggings Lululemon is known for. Comparable store sales fell 3% in the Americas in the second quarter ended July 28, missing analyst expectations. Companywide, that metric rose 2% in the period, slowing for a third consecutive quarter.
“We expect the company’s US business to continue to underperform as macro pressures weigh on the consumer, competition continues to increase, and fashion shifts further away from LULU’s core offering,” said Jefferies analyst Randal Konik, who recommends selling the shares, in a research note after the release.
Chief Executive Officer Calvin McDonald’s team has been refining the company’s product assortment to meet demand as shoppers gravitate toward looser-fitting pants. But analysts have questioned some of the product strategies as rivals such as Alo Yoga and Beyond Yoga appear to gain market share.
“We are concerned that their proposed fixes (adding more newness in the form of prints/colors to the assortment) won’t be enough to reignite US sales,” Citi analyst Paul Lejuez wrote. “We believe there may be more cuts to guidance ahead.”
Traffic was up last quarter, but McDonald said he was “disappointed with the recent performance in women’s,” citing missed opportunities because the retailer didn’t offer enough new products in both core and seasonal styles.
Outside of North America, the company is still posting robust growth, with comparable sales rising 19%. In mainland China, where the company is looking to expand, that measure gained 21%.
Lululemon shares rose 1.2% at 9:33 a.m. in New York trading on Friday. The stock had fallen 49% so far in 2024 through Thursday’s close, versus a 17% increase for the S&P 500 Index.
Wedbush Securities analyst Tom Nikic said ahead of the results that a guidance cut from Lululemon was “pretty much baked into buyside expectations” after the Vancouver-based company paused sales of its Breezethrough tights and shorts in July.
“This looks like it could be the clearing event we’ve been waiting for,” Truist Securities analyst Joseph Civello wrote. “In our view, the positive response to reset expectations may be a signal that sentiment has bottomed.”
McDonald said on Thursday’s earnings call that the decision to pause Breezethrough sales to address quality issues had a “negligible” impact on performance in the quarter. He said Lululemon plans to reintroduce the fabric at an unspecified date in the future. Analysts had previously seen Breezethrough as a key growth driver.
“While guests were excited by the fabric, the design didn’t meet their expectations,” he said.
(Updates share trading.)
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