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Why lululemon Is Expecting a Holiday Slowdown

By Demitri Kalogeropoulos - Dec 18, 2020 at 8:55AM

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Capacity challenges will pressure sales growth over the next few months.

Wall Street can be hard to please. Investors pushed lululemon athletica's ( LULU 1.46% ) stock lower following the chain's fiscal third-quarter report, even though sales and profit figures each surpassed expectations. Investors looked right past that success to focus on a few warning signs about the near future that imply a rocky period for the athleisure giant's business.

CEO Calvin McDonald and his team outlined those issues in a conference call with analysts. Executives stressed the fact that they're likely temporary and that lululemon's long-term outlook is as bright as ever.

Let's look at some highlights.

Three young women with shopping bags

Image source: Getty Images.

Winning in a competitive market

"In fiscal Q3 our [market] share performance continued with our strongest quarterly market share gain in recent history. We grew our retailer market share of the U.S. adult active apparel market by 1.4 points over last year." -- McDonald

While COVID-19 has pressured some parts of the apparel industry as more people work from home, the athleisure segment is booming. Lululemon is winning a bigger piece of that expanding pie, too, with sales rising 18% after adjusting for exchange rate shifts.

That increase was supported by improving traffic to its physical stores and from surging e-commerce volumes. Lululemon's stores rebounded to 82% of last year's sales level, while executives were bracing for a weaker 75% result. The retailer made notable gains in new demographics, like menswear, and across categories outside of its traditional strength in women's bottoms. "These results demonstrate our brand is becoming stronger," McDonald said.

Things will get worse before they get better

"As we are seeing a resurgence of COVID-19 in several markets, we've experienced a higher number of government mandated capacity restrictions in November and December relative to Q3." -- CFO Meghan Frank

Pandemic outbreaks have flared up again in key markets around Europe and North America, and the resulting retail restrictions have management predicting slower growth over the holidays. In fact, stores should only operate at about 70% of last year's volume in the fourth quarter, they warned -- compared to last quarter's 82% -- as governments seek to limit crowds.

The expanding digital business will make up for some of that slump, but lululemon will still feel a pinch from having to limit in-store traffic during a period that usually sees its stores packed with holiday shoppers.

Plan for a slowdown

"In our store channel we will leverage our seasonal stores, virtual waitlist, mobile point-of-sale and appointment shopping to ease capacity constraints and continue to protect the safety of our store teams. And in e-commerce our investments are paying off as our sites have demonstrated the ability to more than handle the anticipated spike in volume." -- McDonald

Executives pulled forward some of their planned 2021 e-commerce spending to ensure a smooth shopping experience this year despite extra pressures on the digital fulfillment network. Lululemon is also doing its best to minimize store traffic losses using features like online check-ins and appointment shopping.

These moves should give the retailer a good shot at maintaining its positive market share momentum in Q4. And another period of strong growth for the industry might push sales up above management's forecast, just as it did this past quarter. But lululemon's outlook still calls for growth trends to take a step backwards over the next few weeks as COVID-19 pressures return. Investors should lower their short-term expectations accordingly. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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