Lululemon Athletica (LULU) is not expected to post the firm's fourth quarter earnings until late March, so this morning's news comes a little earlier than some might have looked for it. The timing probably has something to do with the ICR Conference running from today (Jan 9th) through Wednesday (Jan 11th) in Orlando, Florida, where Lululemon is not expected to present, but will meet with analysts and investors.
On Monday morning, Lululemon provided some updated guidance for the fourth quarter. Last we heard from LULU prior was December 8th when the firm reported its third quarter numbers where it beat expectations for both the top and bottom lines, but the stock dropped more 12% as fourth quarter guidance disappointed.
Today, LULU made further changes to that guidance, and the stock has again moved lower in response. Readers should know that for LULU, the fiscal third quarter did not end until October 30th, hence the fourth fiscal quarter is ongoing through the end of this month.
On Monday Morning, Lululemon announced that fourth quarter revenue is now seen landing in a range spanning from $2.66B to $2.7B, which is up from prior guidance of $2.605B to $2.655B. Wall Street is at $2.67B on this number. No problem there. However, LULU now sees gross margin for the quarter contracting 90 to 110 basis points versus previous expectations for an increase of 10 to 20 basis points.
After further leveraging general and administrative expenses in order to offset some of this impact, the firm now sees Q4 EPS in a range of $4.22 to $4.27, narrowing prior guidance of $4.20 to $4.30. The problem there is that the consensus view was for $4.30 with some Wall Streeters as high as $4.40.
CEO Calvin McDonald commented... "We are pleased with our continued revenue growth and momentum in the business, as our teams navigate a dynamic macro-backdrop. In 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. 2022 has been a strong year for Lululemon, and we remain focused on the significant opportunities ahead as we continue on our Power of Three x2 growth plan."
For those who do not regularly follow this name, Lululemon's Power of Three x2 growth plan calls for a doubling of the business from it's 2021 net revenue of $6.25 billion to $12.5 billion by 2026. The three pillars of this plan are expected to be product innovation, consumer experience, and market expansion. The strategy includes a plan to double the men's business, double direct to consumer, and quadruple international net revenue relative to 2021.
There are some problematic items that traders and investors must consider when evaluating Lululemon. For one, operating cash flow has been in decline, which has led to negative free cash flow for three consecutive quarters. The earnings and growth has still been there, which is one big reason why LULU closed on Friday at 35 times forward looking earnings. That 35 times multiple can also be an anchor upon equity price performance at a time in market history where sales growth is becoming less highly valued than cash flow and fundamentals.
That said, the balance sheet is still in good shape from a "current" perspective and was built with an eye toward weathering storms such as the one presently facing this firm as well as the global economy. As of the end of the third quarter, LULU ran with a current ratio of 1.99, which is very strong.
However, the majority of the firm's current assets at that time were in inventories. Sans those inventories, LULU posted a quick ratio of just 0.68. Not the end of the world for a retailer, but definitely a condition that would pressure and is pressuring margin, and something worth monitoring.
Away from enlarged inventories, the firm stood with a cash balance of $352.6M with no long or short-term debt on the balance sheet. Nor does the firm rely on intangible assets to bloat the asset side of the balance sheet. Lululemon has to manage their inventories, which is reality in retailing 2022/2023. LULU is not immune.
Earlier I saw a sale of $295.50, which was down 10.25% from Friday's closing price. The stock had traded as low as $280 this morning. The stock has regained its 200 day SMA (simple moving average), 21 day EMA and the lower trendline of this Pitchfork model all in recent sessions. All of that progress will be lost this morning.
It's hard to predict the impact of losing the 200 day SMA as (readers can see) that whenever LULU either gains or loses that line, the direction of the move tends to be exacerbated. Upon pressure, holding the $277 low from this past September would be key. I don't think this selloff goes that far.
The level that I am watching for a trade would be the $302 Fibonacci retracement of the November into December selloff. There has been support here before. I either wait for this level to be retaken and jump aboard on momentum, or hang out in the high $270's. I am not going to grab a few shares in the mid $290's with potential $302 resistance staring me in the face.