Lululemon’s Q3 Profit Underperformers Fears Stock Selloff

Bloomberg Lululemon Athletica Inc. shares fell as lower than expected profitability raised concerns about a pileup of inventory and the full-year sales forecast disappointed Wall Street.

In the third quarter, the gross margin, a key indicator of profitability, was 55.9%, short of analysts average estimate of 56.7%. Inventories surged from a year earlier, evoking similar problems experienced by retailers that have resulted in profit-busting markdowns.

Poonam Goyal, a Bloomberg Intelligence analyst said that the gross margins came in well below expectations, which is a concern, especially as inventories are up 85%.

The third quarter will be the high point for inventory according to executives on the company s call with analysts. The rate of inventory growth will be moderate at the end of the fourth quarter, according to Chief Financial Officer Meghan Frank.

Lululemon raised its sales forecast for the full year ending January to as much as $7.99 billion. The low end was still less than analysts average estimates, although that was up from the previous range of as much as $7.94 billion.

The shares fell 9.2% in after-market trading in New York on Thursday. The stock has declined about 5.6% this year through Thursday s close.

The company hasn't seen a significant shift in spending among our guests, according to Chief Executive Officer Calvin McDonald. McDonald said in an interview that we are off to a strong start this holiday season and I am pleased with our results over the extended Thanksgiving Day weekend. Black Friday was the biggest day in our history in terms of revenue and traffic. Lululemon is looking to double sales by the end of the fiscal year in early 2027 by opening more stores, expanding abroad and selling more products to men. It is trying to keep customers coming back and it is trying a new two-tier membership program.

McDonald said that the company's manufacturing partners are back to full capacity. Freight times have improved, although they remain higher than pre-pandemic, he added. In recent years, the company has resorted to air freight, which is more expensive.

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