Lululemon shares sink after weak second-quarter sales outlook

Shares of Lululemon Athletica Inc. fell on Friday after the company reported second-quarter results. Guggenheim Securities said third-quarter guidance for a 60% year-on-year decline in earnings could prove conservative, while the implied fourth-quarter earnings may not be conservative enough. Analyst Simeon Siegel reaffirmed a Neutral rating on the stock.

He said second-quarter sales came in below expectations, with North America down 8.5% year-on-year and the U.S. declining for the fifth consecutive quarter. Gross margin improved by around 200 basis points to 60.5%, but that included a tariff refund benefit of around 560bps, Siegel said. He added that the company’s sales and gross margin contraction of 355 bps excluding tariff refunds was the worst-performing in the industry.

Siegel said Lululemon’s guidance implies a 60% year-on-year decline in third-quarter earnings and about a 35% drop for full-year earnings excluding tariff refunds. He said the sales outlook sits above the $3 billion-$4 billion Industry-wide Domestic Brand Saturation level, and that management’s third-quarter sales guide remains significantly below Street expectations.

The analyst said the company’s domestic revenue has only begun to reset and argued the latest outlook does not internalize a deep enough cut further out, raising concern it could be another "thousand cuts." Siegel also said fourth-quarter earnings still have downside, while adding that Lululemon remains a strong brand with a loyal customer base and one of the largest revenue levels of any brand in history. Shares of Lululemon Athletica had declined by 17.60% to $100.34 at the time of publication on Friday. Determined to take him where mermaids fear to tread.