Lululemon shares pop 12% despite lackluster earnings report and guidance

Lululemon‘s growth in the Americas, its largest market, appears to be stalling after the retailer on Wednesday reported flat comparable sales in the region and weak guidance for the current quarter. 

The athletic apparel retailer handily beat Wall Street’s earnings estimates, but only narrowly topped revenue expectations. Lululemon’s full fiscal year guidance suggests the company is betting conditions will improve in the back half of the year. 

Here’s how Lululemon did in its first fiscal quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

• Earnings per share: $2.54 vs. $2.38 expected
• Revenue: $2.21 billion vs. $2.19 billion expected

Despite the tepid growth, Lululemon’s stock jumped 10% in extended trading Wednesday. The company also announced it would add $1 billion to its stock buyback program.

The company’s reported net income for the three-month period that ended April 28 was $321 million, or $2.54 per share, compared with $290 million, or $2.28 per share, a year earlier.  

Sales rose to $2.21 billion, up about 10% from $2 billion a year earlier.

In a news release, CEO Calvin McDonald touted the “strong momentum” the company is seeing in its international markets and hinted that it needs to do more work in the Americas to grow in the region again.

“We are pleased by the progress we are making to optimize our U.S. product assortment,” said McDonald. “Looking ahead, we continue to have a significant runway for growth and are confident in our team’s ability to powerfully deliver.” 

Last quarter, McDonald said the company was seeing consumer dynamics change in the Americas, but also noted Lululemon fumbled by not having the right sizes and colors in its stores, which hit sales. During a call with analysts on Wednesday, McDonald said those issues continued during the fiscal first quarter.

He said Lululemon’s color assortment was too narrow in leggings, and the company was once again out of stock of the sizes its customers wanted. McDonald added the company didn’t buy enough of the items that were landing with consumers, leading to products being out of stock. He said he expects the company to be in a better inventory position in the second half of the year.

Lululemon is still growing in the Americas, but at a much slower pace than last year. During the first quarter of this year, sales in the Americas increased 3%, versus a 17% jump in the year-ago period. Comparable sales were flat from last year. 

Across the business, Lululemon’s comparable sales grew 6%, below the 7% uptick that analysts had expected, according to StreetAccount. 

As growth in the Americas slows, Lululemon issued weak guidance for the current quarter. It expects revenue to be between $2.40 billion and $2.42 billion, just below estimates of $2.45 billion, according to LSEG. It guided earnings per share to be between $2.92 and $2.97, compared to estimates of $3.02, according to LSEG. 

The company appears to be expecting conditions to improve in the second half of the year. For the full year, Lululemon expects earnings per share to be between $14.27 and $14.47, ahead of the $14.11 that analysts had expected. It’s expecting revenue to be between $10.7 billion and $10.8 billion, which is in line with expectations, according to LSEG. 

Lululemon, still widely considered to be a best in class retailer and a market leader, has hit a bit of a rough patch as of late. Its stock is down 40% year to date as of Wednesday’s close, as investors become concerned about its growth prospects. 

It recently announced that its longtime chief product officer Sun Choe would be resigning, which caused shares to fall. Lululemon could also soon find itself on the other side of trends. Denim is having a major moment with consumers, and investors have been concerned that shoppers could be swapping athleisure for jeans, which could hit Lululemon’s topline. 

Read the full earnings release here.