Shares of Lululemon Athletica (LULU -2.56%) dropped 9.3% on Monday after the athletic-wear specialist released a revision to its previously issued guidance for its fourth quarter of fiscal 2022, which ends Jan. 29. (The fiscal fourth quarter is not the same as the calendar quarter. So the company's release should be considered an update to guidance, rather than a preliminary result, because the quarter is not over.)
Lululemon revised its outlook for revenue, adjusted earnings per share (EPS), and gross margin. It's safe to assume that the stock sell-off was driven by the gross-margin revision, as the expectation for this metric was lowered. The adjusted EPS expectation (at the midpoint) was essentially unchanged, while revenue guidance was raised.
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Updated fiscal fourth-quarter guidance
The company's prior guidance was issued in early December, when it released its fiscal third-quarter results, which were stronger on both the top and bottom lines than Wall Street had expected.
| Metric | Prior Guidance | Annual Growth Implied by Prior Guidance | Current Guidance | Annual Growth Implied by Current Guidance |
|---|---|---|---|---|
| Fiscal Q4 revenue | $2.605 billion to $2.655 billion | 22% to 25% | $2.66 billion to $2.7 billion | 25% to 27% |
| Fiscal Q4 adjusted EPS | $4.20 to $4.30 ($4.25 midpoint) |
24.6% to 27.6% (26.1% midpoint)* |
$4.22 to $4.27 ($4.245 midpoint) |
25.2% to 26.7% (25.95% midpoint)* |
| Gross margin | Increase 10 to 20 basis point YOY | -- | Decline 90 to 110 basis points YOY | -- |
Data source: Lululemon. *Calculation by author. YOY = year over year.
Granted, the downward revision of the gross-margin expectation is disappointing. That said, management is mitigating the impact of the expected lower gross margin on earnings by decreasing its expenditures. The company said in the release that it now "expects that it will further leverage selling, general and administrative [SG&A] expenses 100-120 basis points compared to its previous expectation of 30-50 basis points of leverage."
As the chart shows, the current adjusted EPS guidance at the midpoint of the range is essentially unchanged from the prior guidance at the midpoint.
What management had to say
Here's what CEO Calvin McDonald had to say in the press release:
We are pleased with our continued revenue growth and momentum in the business, as our teams navigate a dynamic macro-backdrop. In [fiscal] Q4, traffic remains strong across both physical and digital channels, and we anticipate delivering another quarter of solid earnings growth consistent with our updated EPS forecast. [Fiscal] 2022 has been a strong year for lululemon, and we remain focused on the significant opportunities ahead as we continue to deliver on our Power of Three x2 growth plan.
Did investors overreact?
A 9.3% sell-off seems somewhat of an overreaction to the company's revised fiscal fourth-quarter guidance.
However, it makes sense when you consider two factors: Lululemon is a highly valued stock, so investors have high expectations, which means that even a small hiccup in the company's results or guidance can send shares tumbling. In addition, investors' jitteriness was probably a factor, as they are particularly anxious about consumer discretionary companies in general because of the challenging macroeconomic environment.
Much of the selling on Monday was probably by short-term traders. Long-term investors should not place too much importance on results or guidance for one quarter or even for one year.
