Lululemon shares sink after weak second-quarter sales outlook
Lululemon Athletica shares fell after second-quarter sales missed expectations, North America revenue declined 8.5% year on year and U.S. weakness extended to a fifth straight quarter.
Shares of Lululemon Athletica Inc (NASDAQ: LULU ) tanked on Friday, after the company reported its second-quarter results. • Lululemon Athletica stock is testing lower boundaries.
What’s pressuring LULU? While the company’s third-quarter guidance of a 60% year-on-year decline in earnings could prove conservative, the implied fourth-quarter earnings "may not be conservative enough," according to Guggenheim Securities.
The Lululemon Athletica Analyst: Analyst Simeon Siegel reaffirmed a Neutral rating on the stock.
The Lululemon Athletica Thesis: The company reported its second-quarter sales below expectations, with North America declining 8.5% year-on-year and the U.S. down for the fifth consecutive quarter, Siegel said in the note.
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Although Lululemon Athletica’s gross margin improved by around 200 basis points (bps) to 60.5%, this included a tariff refund benefit of around 560bps, the analyst stated.
The company’s sales and gross margin contraction of 355 bps (excluding tariff refunds) were the worst-performing in the industry, he added.
See More: Top Value Stocks Outlook: Lululemon Athletica’s U.S. brand was "meaningfully overstretched, well above our $3 billion-$4 billion Industry-wide Domestic Brand Saturation level," Siegel wrote.
While management guided to third-quarter sales significantly below Street expectations, the company’s "domestic revenue has only begun to reset," the analyst stated.
The sales guidance "doesn’t internalize a deep enough cut looking further out," which sparks concerns around the latest outlook just being one of a "thousand cuts," he added.
The third-quarter earnings guidance reflects a 60% year-on-year decline and the full-year guidance excluding tariff refunds shows earnings declining by around 35%, Seigel noted.
While the third-quarter earnings guidance is likely conservative, there is downside to fourth-quarter earnings, the analyst said.
Although Lululemon Athletica is a strong brand, has a loyal customer base and is among the largest revenue levels of any brand in history, "we believe it is simply too large and still likely both over-selling and over-earning," he further wrote.
LULU Price Action: Shares of Lululemon Athletica had declined by 17.60% to $100.34 at the time of publication on Friday.
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