LULU misses top line expectations; Can it rally anyway?
Lululemon Athletica delivered mixed Q2 results, with EPS outperforming expectations while revenue fell short. The company reported earnings per share of $3.15, exceeding the consensus estimate of $2.93. However, revenue came in at $2.37 billion, slightly below the anticipated $2.41 billion. This revenue miss, coupled with a modest 2% increase in comparable store sales, underscores the challenges Lululemon is facing in its core U.S. market, where softness in consumer demand has impacted performance despite strong international growth.
Key metrics revealed that while Lululemon's gross margin expanded to 59.6%, supported by better-than-expected operational efficiency, inventory levels remained a concern. The company reported inventories of $1.43 billion, which, although below estimates, still represented a substantial 10% increase year-over-year. This rise in inventory suggests potential challenges in managing stock levels amid fluctuating demand, particularly in the U.S., where conversion rates were lower than expected.
In terms of guidance, Lululemon provided a tempered outlook for the remainder of the fiscal year. The company now expects full-year revenue to be between $10.375 billion and $10.475 billion, down from its previous forecast of $10.7 billion to $10.8 billion. Similarly, the EPS guidance was adjusted to a range of $13.95 to $14.15, slightly below the earlier range of $14.27 to $14.47. This cautious outlook reflects management's acknowledgment of ongoing challenges in the U.S. market and the need to adjust strategies accordingly.
Several key drivers influenced these results and the revised guidance. International markets, particularly China, continued to be a bright spot, with sales growing by 29% year-over-year. However, the U.S. market struggled due to what management described as missed conversion opportunities and ongoing softness in consumer spending. Lululemon has been adjusting its women's size availability and is focusing on innovation in color, print, and patterns to drive future growth, but these efforts will take time to materialize fully.
Following the earnings announcement, Lululemon's stock saw a mixed reaction, initially rising 4% in premarket trading before pulling back. The stock's technical setup is currently within a descending channel, and the premarket move suggests a potential retest of key resistance levels. Investors should watch for a breakout above the $272 level, which could signal a move toward $293 and potentially higher levels, depending on broader market conditions and the company's ability to execute its turnaround strategy.
In conclusion, Lululemon's Q2 results highlight both the strengths and challenges the company faces. While international growth remains robust, the softness in the U.S. market and the tempered guidance have weighed on investor sentiment. The stock's price action suggests that traders are cautiously optimistic, with key technical levels likely to play a significant role in the near-term direction of the share price. As Lululemon continues to navigate these challenges, its ability to innovate and adapt will be critical to regaining momentum in the quarters ahead.