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Earnings Results: Lululemon stock drops after retailer reports mixed quarterly results, high inventories

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Lululemon Athletica Inc. stock slid in the extended session Thursday after the athleisure-wear maker reported mixed quarterly results and saw inventories soar.

However, management for the company, during a conference call to discuss the results, said they were comfortable with their levels of unsold goods, and said the state of its warehouses and backroom shelves left the company well-stocked for the holidays.

Chief Executive Calvin McDonald said during the call that Lululemon’s
LULU,
+0.59%

core styles still made up around 45% of that inventory, and carried “limited seasonal markdown risk.” He added that supply chains were opening up, and that the third quarter represented “the high point” for its inventories, when measured by dollar amount.

“As we discussed, our inventory levels were too lean last year, and we made the strategic decision to build inventories this year, which enabled the strong top-line growth we have delivered,” he said.

The retailer, in its earnings release prior to the call, said it ended the third quarter with inventories up 85% to $1.7 billion, compared with $900 million at the end of the third quarter of 2021.

“The company believes its inventories are well-positioned to support its expected revenue growth in the fourth quarter,” it said in a statement.

Lululemon earned $735 million, or $2 a share, in the third quarter, compared with $541 million, or $1.44 a share, in the same quarter last year. Adjusted for one-time items, Lululemon earned $1.62 a share.

Revenue rose 28% to $1.9 billion, the company said. Same-store sales were up 22%.

Analysts polled by FactSet expected Lululemon to earn $1.97 a share on revenue of $1.81 billion. Same-store sales were expected to rise 19.1%.

“We are proud to have delivered another quarter of strong sales and earnings growth, despite an operating environment that remains dynamic,” Chief Financial Officer Meghan Frank said in the release.

Lululemon forecast fourth-quarter revenue between $2.605 billion and $2.655 billion, and adjusted earnings per share between $4.20 and $4.30.

For the full year, the company expects revenue between $7.944 billion and $7.994 billion, and adjusted EPS between $9.87 and $9.97. FactSet consensus calls for EPS of $9.92 on sales of $7.935 billion.

Shares were down 7.3% after hours Thursday evening. In the earlier stretches of after-hours trade, they were down as much as 10%.

Analysts were relatively upbeat about Lululemon heading into the results, saying the company was able to keep its prices higher, even while other retailers cut theirs as more expensive essentials reshape consumer demand, leaving clothing and other goods stuck in boxes in warehouses.

Retailers have slashed prices on clothing in an effort to clear shelves and entice customers. But Raymond James analysts, in a note this week, said they found that Lululemon “didn’t have broad-based promotions” in the third quarter, or the fourth quarter so far.

They said that the company leaned on its “We Made Too Much” section to iron out its inventories. And they noted a jump in downloads for Lululemon’s app. However, they said business in China “could be a curveball” amid that nation’s COVID-19 restrictions.

Piper Sandler analysts, in October, also said that Lululemon remained more insulated than other clothing retailers from big markdowns.

Lululemon stock is down 4% so far this year. The S&P 500 Index
SPX,
+0.75%
,
by comparison, has slid 17% over that time.

Claudia Assis in San Francisco contributed to this report.

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