STORY: Shares of Lululemon fell as much as 12% in early trading on Monday, after the Canadian apparel maker said it expects gross margins from the holiday-quarter to decline.

The “athleisure” chain is grappling with increased costs amid a drop in consumer spending due to stubbornly high inflation.

A sharp rise in inventory levels has forced several retailers to offer discounts and mark down prices.

That's put a dent in margins across the apparel sector.

Inventories at lululemon rose 85% at the end of the third quarter to $1.7 billion.

Despite the holiday woes, the company did raise its net revenue forecast for the fourth quarter and expects revenue growth of 25% or more, year over year, to as much as $2.7 billion.

In contrast, apparel retailers Abercrombie & Fitch and American Eagle Outfitters issued upbeat holiday-quarter expectations on Monday, benefiting from strong demand across their brands.