Can Lululemon Overcome Its Inventory Glut In Q4? Some Analysts Say Yes

Ahead of Lululemon’s fourth quarter and full-year earnings report next week, some analysts are hopeful that the brand will progress in overcoming its inventory glut.

The Vancouver, British Columbia-based brand , which reports results on Tuesday, lowered its guidance in January, reflected weak predictions for the holiday season and a hit to profit due to increased markdowns.

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Lululemon projects Q4 net revenue to be between $2.660 billion to $2.700 billion, compared to a previously outlined range of $2.605 billion and $2.655 billion. Q4 diluted earnings per share are expected to be between $4.22 and $4.27, tighter and lower than the previously outlined range of $4.20 and $4.30. Gross margin is Q4 is expected to decline between 90 and 110 basis points.

The anticipated gross margin pressure is partly due to an increase in discounting to clear through excess inventory as well as unfavorable foreign exchange rates impacting the brand’s growth overseas. As such, analysts say Lululemon’s ability to clear through its inventory excess will be a key metric this quarter for investors. It’s also not entirely out of reach.

When it comes to inventory, analysts noted that discounting at Lululemon appears to have moderated throughout Q4. According to UBS data from analyst Jay Sole, Lululemon’s online and in-store inventory is “starting to get under control.” At the same time, the retailer’s typical pattern is to have inventory drop between Q3 and Q4, which would could also help alleviate higher-than-usual inventories.

Wedbush analyst Tom Nikic also noted that Lululemon’s discounts, specifically via its “Made Too Much” section on its website, have recently moderated, suggesting that inventory pressure is cooling.

“Given minimal discounting in brick-and-[mortar] stores, we believe the moderation of discounting online is a sign that Lululemon’s inventories are getting back in line, and that the worst is behind them from an inventory/gross margin perspective,” Nikic wrote in a Friday preview to investors, in which he maintained a bullish view on the stock.

Nikic also pointed out that Lululemon’s margin pressure is less worrisome when compared to its athletic apparel peers like Nike, Adidas and Under Armour.

On a broader level, retail companies have reported sluggish sales and earnings misses this quarter as they manage through inflation, foreign exchange headwinds and consumer caution.  Genesco, which owns Journeys, Johnston & Murphy and Schuh, this quarter adopted a cautious outlook for fiscal year 2024 after reporting weak results for the holiday season. Nordstrom Inc. was impacted by steeper markdowns and macro-economic headwinds and reported fourth quarter declines on the both the top and bottom lines earlier this month.

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