Lululemon shares jump despite guidance cut, Q2 revenue miss

Lululemon Athletica (NASDAQ:) reported better-than-expected second-quarter earnings but cut its full-year revenue guidance.

The athletic apparel retailer posted adjusted earnings per share of $3.15 for the quarter ended July 28, surpassing analyst estimates of $2.94. Revenue grew 7% YoY to $2.4 billion, slightly below the consensus forecast of $2.41 billion.

LULU shares initially fell in after-hours trading Thursday, before recovering into the green. The stock traded up 4.5% in Friday’s premarket at the time of writing. 

Comparable sales increased 2%, or 3% on a constant dollar basis. While international sales surged 29%, growth in the Americas slowed to just 1%.

Looking ahead, Lululemon provided weaker-than-anticipated revenue guidance. For the third quarter, the company expects revenue between $2.34 billion and $2.365 billion, below analyst projections of $2.41 billion.

The company reduced its full-year revenue guidance range to $10.375 billion to $10.475 billion, from $10.7 billion -$10.8 billion previously. The new guidance misses consensus estimates of $10.62 billion.

“In the second quarter, lululemon delivered revenue and earnings growth, with ongoing strength across our international business,” said CEO Calvin McDonald. “In the U.S., our teams continue to optimize our product assortment and remain focused on driving forward our opportunities in the market.”

Gross margin expanded 80 basis points to 59.6%, while operating margin increased 110 basis points to 22.8%. The company opened 10 net new stores during the quarter, ending with 721 locations.

Commenting on the report, Stifel analysts highlighted that LULU’s U.S. consumer engagement, traffic, and men’s remained positive, while women’s business conversion softened. However, they believe this is “a merchandising misstep,” rather than a structural/brand issue, meaning it’s “a fixable problem.”

“Ultimately, LULU will have to prove inflection in the U.S. business to dispel the bearish narrative,” they added. “In the interim, we see shares as undervalued and, with visibility to inflection in the U.S. business, we expect shares to rerate meaningfully higher by early 2025.”

Separately, Morgan Stanley analysts said the positive share reaction on the back of a revenue miss and guidance cut “confirms the low bar/bearish sentiment heading into the print,” and points to a possibility “that the market has potentially assigned a floor to LULU’s valuation in the ~high-teens P/E range.”

Looking ahead, Morgan Stanley analysts believe that management’s Q4 and full-year guidance sets a low and achievable target, which could allow for EPS outperformance in the near term (NTM).

“This EPS protection, when considered against low valuation for a still-premium asset, to us means the risk/reward skews to the upside from here on an NTM basis,” analysts noted.

Senad Karaahmetovic contributed to this report.