All eyes on margins ahead of Lululemon earnings
By Julie Gordon and Sneha Banerjee
VANCOUVER/BENGALURU (Reuters) - Investors will be scrutinizing inventory and margins when Lululemon Athletica (LULU.O: Quote) reports its third quarter earnings on Wednesday, as fears mount that competitors are eroding the yoga wear-maker's share of the lucrative athleisure market.
Once the darling of the retail space, the Vancouver-based company has struggled in recent years with a series of mishaps, from a high-profile recall of overly sheer yoga pants in 2013 to supply chain hiccups that led to bloated inventories this year.
In September, executives reassured investors that the supply chain issues had been resolved, but noted that inventories would stay elevated as late spring and summer products joined fall and winter inventory on shelves.
That added inventory led to extra warehouse sales, and many analysts expect that sales in the third quarter will be driven by markdowns, putting more pressure on gross margins.
Add in tougher competition from the likes of Nike and Under Armour, who are creating innovative products that tend to sell at a slightly lower price point, and the company could be facing an upward battle against narrowing margins.
"It's going to be tough for them," said Susan Anderson, an analyst with FBR Capital Markets & Co. "I think they have to keep their brand's image and their quality up to justify their really high price points."
Analysts also highlighted expensive air freight as a potential sore spot, with production delays leaving the retailer dependent on shipping by plane.
"Air freight costs you $2 to $2.50 per garment ... versus 40 cents for putting it on a boat," said Christian Buss, an analyst with Credit Suisse, adding the company has said it ships 40 to 50 percent of product by air, while the industry average is less than 15 percent. Continued...