Gross Margins and Inventory Will Be Key With Lululemon Earnings

Companies and Brands

Published: March 28, 2016 11:10 am

Last Updated: January 13, 2020 11:28 am

What has happened with Lululemon Athletica Inc. (NASDAQ: LULU) since December serves as one more instance of official analyst downgrades to be either ignored or even used as contrary indicators. It was back in early December when Susan Anderson at FBR downgraded the yoga clothing and apparel retailer to a target of $42 from $55. Since then, the stock is up 27% with good news continuing to flow in. One wonders how those who rate stocks in an official capacity actually make money unless they are not taking their own advice. One thing FBR got correct though, sort of, was the price target of $42. The low was hit at $43.14 two weeks before the call was ever made.

Back in December, Lululemon was suffering from a backup in inventory, a concerning problem for sure, and one that could have indicated a fundamental lack of demand for its products, or else minor balancing issues caused by unforeseen logistical problems. In this case it was the latter. Analysts were concerned with declining margins due to deep discounts the clothing retailer was forced to enact at the time. It had to because of problems at trading ports rather than a lack of demand for its products.

Lululemon is now dealing with those issues in a surgical manner rather than completely changing its business model, which makes sense given that this was a surgical problem and not a systemic business issue. The word “inventory” was mentioned 31 times in its most recent earnings call, and the company anticipates the problem to be fully dealt with, or nearly so, by the end of the first quarter.