Lululemon faces low expectations for Q3 earnings

Lululemon Athletica Inc is set to report third quarter earnings in early December, as investors watch for signs of a further slowdown in the company’s North American business. 

On average, analysts predict Lululemon to post a revenue of $2.36 billion in this past quarter, up from $2.2 billion in the same period last year — a rise of about 7 percent. 

That would be a decent growth, but still far from the double-digit percentages the company saw only a few quarters ago. Maintaining and increasing sales growth will be important for the brand, analysts said, as it seeks to turn around a difficult year in the stock market and address challenges bringing in customers. 

“I don’t think people are really anticipating that the third quarter numbers are going to show a great turnaround,” said David Swartz, a senior equity analyst at Morningstar. “Expectations are not super high at this point.”

Lululemon’s stock price has plunged more than 35 percent so far this year. However, investors have recently been more bullish about the company’s shares, with the price increasing 37 percent in the last three months. 

Sales for this latest quarter likely benefited from the company offering a 25 percent off sale for certain customers, said Matthew Jacob, an equity research analyst at M Science. 

But such a discount is likely to also hit the company’s profit margin, Jacob said, and may also lead to slower sales in the company’s next release. 

“It probably had the effect of pulling forward a lot of sales from November and December into October,” he said. “You’re offering 25 percent off for 15 items. That’s a recipe for, ‘That’s great, I’ll go holiday shopping early.’”

Analysts on average expect adjusted earnings per share to be $2.71, up from $2.53 in the third quarter of last year. Net income is expected to reach about $337.88 million, up from $248.71 million in the same period last year, representing a 35 percent rise in profit. 

Another thing to watch is the company’s performance in China. With a spending slowdown and increased competition in the United States, the brand has turned to the Asian market to fuel new growth. The venture has so far been remarkably successful, and the premium brand has been able to outcompete companies making cheaper “dupes” of its fabrics. Swartz said he expects sales growth in China to come in at 36 percent. However, there still may be challenges down the line. 

“That is the highest growth area for the company at the moment and where Lulu is opening most of its stores,” he said. “There is a concern that the economy there is not necessarily in great shape.”