For years, Lululemon could sell premium leggings with pricing power and customer loyalty most apparel companies envied. Its latest quarter suggests that advantage is being tested.
Revenue fell 4% to $2.42 billion in fiscal Q2, comparable sales dropped 9%, and the company cut its full-year revenue outlook to $10.35 billion to $10.5 billion, implying a 5% to 7% decline. LULU sank as much as 20% after hours.
More worrying was the product signal. Management said leggings sales fell about 20% as shoppers shifted towards looser silhouettes, raising a bigger question about whether Lululemon has lost some of its product authority.
The problem is getting shoppers to buy
Lululemon remains financially healthy, which makes the weakness harder to dismiss as a balance-sheet issue.
Morningstar senior equity analyst David Swartz told Yahoo Finance after the results that the company has “no real financial problems” and that “the problem is with the sales growth.”
Swartz said shoppers have seen similar colours, leggings and styles too often, while stronger competition from Alo Yoga, Vuori, Skims and traditional athletic brands has given customers more choice.
The quarter supports that concern. Americas revenue fell 8%, while international revenue rose only 4%, offering less of an offset than investors had become accustomed to.
The issue therefore looks operational rather than purely macroeconomic. Lululemon still has a premium brand, but customers are not responding strongly enough to the current merchandise.
Wall Street fears a brand problem
Truist analyst Joseph Civello downgraded Lululemon to Sell in July and warned that the company’s headwinds could prove “more structural” than Wall Street was assuming.
His concern was that challenger brands were gaining traction even in a difficult consumer environment.
Goldman Sachs analyst Brooke Roach also lowered her target to $111 from $122 before earnings.
The firm cited weakening card spending, traffic and sentiment, elevated promotions and moderating growth in China as reasons stabilisation was becoming harder to forecast.
Bernstein analyst Aneesha Sherman has framed the risk more starkly.
She previously asked whether Lululemon was dealing with a product issue that could be fixed within a year or a brand problem that could weigh on sales and valuation for much longer.
A new CEO inherits a harder turnaround
Heidi O’Neill takes over as chief executive on September 8 after a long career at Nike, including senior roles in product and women’s apparel.
Swartz told Yahoo Finance that her product-development background could be well suited to Lululemon’s current problem because the company needs improvement in merchandise, not financial stability.
Management is already lowering expectations. Lululemon now plans about 35 new stores this year rather than 40, while its annual revenue forecast has been cut sharply from the $11 billion to $11.15 billion range issued only a few months ago.
There are still reasons for optimism. Newer away-from-body products, including wide-leg styles, are gaining traction, and management is increasing replenishment of items that are selling well.
But the turnaround now has to prove that those early successes can restore traffic and full-price demand across the broader assortment.
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