Lululemon Disappoints In Q4, Analysts Say Brand Is 'Strong But Overstretched'

Lululemon Athletica Inc. (LULU) just reported its fourth-quarter earnings, and the results are a mixed bag. The company beat Wall Street expectations for earnings per share (EPS) and revenue, but the stock still tumbled 9.4% in aftermarket trading. Why the sell-off? Analysts are saying the brand is "strong but overstretched," and the market is reacting to concerns about future growth and margin pressures.

Let's break it down:

1. Earnings Beat, But Stock Falls: Lululemon reported an EPS of $6.14, beating the forecast of $5.82 by 5.5%. Revenue reached $3.61 billion, surpassing expectations by $40 million. Despite these strong numbers, the stock fell 9.4% in aftermarket trading. WHY? Investors are worried about the macroeconomic environment and future margin pressures.

2. Growth Concerns: Lululemon's stock has fallen a whopping 50% in 2024, the deepest drawdown of the last 10 years. The company is facing slowing revenue growth in North America, especially in the Women's segment, due to poorly received product launches and increased competition from upstart athleisure brands like Alo and Vuori.

3. Breezethrough Blunder: Lululemon recently pulled its new leggings line, Breezethrough, after receiving negative feedback from customers. This decision has compounded recent in-stock and color palette execution concerns, delaying the reacceleration catalyst likely to 4Q/Holiday.

4. International Growth: While Lululemon is struggling in North America, its international segment is booming. Global Men's revenue is growing 15% year over year, and international revenue is up 35% last quarter. These segments are much smaller than Women in North America, but they are growing rapidly.

5. Share Repurchase Program: Lululemon announced a new $1 billion share repurchase program earlier this year. This should drive further value for shareholders in the coming years, especially if the stock keeps falling.

6. Guidance Disappointment: Lululemon's 2025 guidance disappointed analysts. The company expects net revenue to be in the range of $11.150 billion to $11.300 billion, representing growth of 5% to 7%. Diluted earnings per share are expected to be in the range of $14.95 to $15.15 per share. Analysts were expecting more.

7. Margin Pressures: CFO Meghan Frank said on the earnings call that gross margin for 2025 is expected to fall 0.6 percentage points due to higher fixed costs, foreign exchange rates, and U.S. tariffs on China and Mexico.

8. Macro Concerns: CEO Calvin McDonald said the company conducted a survey earlier this month that found consumers are spending less due to economic and inflation concerns, resulting in lower U.S. traffic at Lululemon and industry peers.

So, what should you do? If you're a long-term investor, this could be an opportunity to buy the dip on a stock that has crushed the market over the last 10 years. But if you're a short-term trader, you might want to stay away until the macroeconomic concerns and margin pressures are resolved.

Remember, the market hates uncertainty, and Lululemon is facing a lot of it right now. But the company has a strong brand, a loyal customer base, and a proven track record of innovation. If management can execute on its Power of Three ×2 growth strategy, Lululemon could still be a winner in the long run.

Stay tuned for more updates on Lululemon and other hot stocks. And remember, always do your own research before making any investment decisions. This is not financial advice, just my take on the market.