Lululemon Profit Misses Estimates Amid Steeper Discounts

  • Increasingly crowded home market has retailer looking abroad
  • Fourth-quarter outlook trails projections as inventory swells

Yogawear retailer Lululemon Athletica Inc. reported third-quarter profit that missed analysts’ estimates as sluggish sales force the retailer to cut prices on more items.

Profit in the quarter ended Nov. 1 was 35 cents a share, the Vancouver-based company said in a statement Wednesday. Analysts estimated 37 cents. Sales rose 14 percent to $479.7 million, also trailing analysts’ average projection.

The results show increased competition from rivals like Nike Inc. and Under Armour Inc. -- as well as unseasonably warm weather -- have Lululemon struggling to clear out a glut of seasonal products. The company’s gross margin -- or the percentage of sales left after subtracting the cost of goods sold -- narrowed to 46.9 percent from 50.3 percent, indicating Lululemon is resorting to steeper discounts to move merchandise.

“Nike is improving their apparel offerings, Under Armour is improving as well, and there are a lot of small, niche brands,” said Camilo Lyon, an analyst at Canaccord Genuity Inc. Lululemon has “some seasonal aspects to their business, but it doesn’t need to be 20 degrees and snowing for their business to operate well.”

More price-slashing may be necessary for the fourth quarter. Lululemon’s inventory swelled 56 percent from a year earlier to $357.8 million. That increase was more than three times the pace of its sales gain. Lululemon said fourth-quarter profit would be 75 cents to 78 cents a share, trailing analysts’ average estimate of 86 cents.

Lululemon fell 13 percent to $45.32 at the close in New York, the biggest decline since Sept. 10. The shares have slid 19 percent this year.

Men’s Expansion

Chief Executive Officer Laurent Potdevin is trying to cope with the increasingly crowded North American athletic-apparel market by expanding internationally. And as rivals like Under Armour tailor more of their offerings toward Lululemon’s female customer base, Lululemon is adding more sales space for men’s items.

Lululemon’s sales at its established locations are still growing, helped by the trend of consumers wearing workout clothing outside the gym -- known as athleisure -- and the addition of more fashionable styles. Comparable sales increased 6 percent last quarter, greater than the 4.3 percent gain analysts expected.

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