Anyone who follows the financial news has certainly heard about how congested supply chains have been over the past year. Surging consumer demand following the depths of the coronavirus pandemic, spurred by record government stimulus, took companies by surprise, and their capacity to produce and ship goods in large quantities was not ready.
Top apparel stock Lululemon (LULU -19.71%), which truly has a global supply chain that sends high-quality merchandise from Southeast Asia primarily to North America, is dealing with these issues. In fact, on the third-quarter 2021 earnings call, CEO Calvin McDonald mentioned that the company's demand is seriously outstripping supply and that its performance last quarter would've been stronger without the supply chain challenges.
Lululemon reports fiscal 2021 fourth quarter financials on March 29, and investors need to keep a close eye on how the business is navigating the current economic environment.
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Holiday supply chain
Lululemon's upcoming earnings release will include November, December, and January, capturing the key holiday-shopping season. Therefore, the fiscal fourth quarter is the most lucrative period for the business. The management team pointed out that increased inventory availability in core products, as well as consumers starting their shopping earlier in the year, would result in a strong quarter.
Inventory is forecast to rise 20% to 25% at the end of Q4 2021 compared to the prior-year period. In the fiscal 2021 third quarter, inventory actually increased more than management's plan. If the business can raise inventory in line with (or exceed) management's expectations, then Lululemon is in a solid position to handle consumer demand. It's a sign of the company's adeptness at sourcing enough merchandise, something that has proven to be a challenge for retailers lately.
Investing in additional air-freight capacity has been a focus. And this will negatively affect the gross margin this quarter by 4.5 percentage points. I wouldn't be surprised if this ends up being higher than management anticipates, a scenario that would clearly hurt profitability.
Going back to what McDonald mentioned on the last conference call, which I alluded to earlier, I do believe that Lululemon's sales number in the current quarter would probably be higher if not for the disrupted supply chain. However, this is a problem facing almost every business right now. It's not specific to Lululemon, and this should ease any worries investors might have.
Lululemon has exceeded expectations before
The management team expects Q4 revenue and adjusted diluted earnings per share (EPS) to come in at the low end of guidance (near $2.125 billion and $3.25, respectively), blaming effects of the coronavirus omicron variant. However, both of these figures would still represent approximately 25% year-over-year growth, still impressive by any measure.
Wall Street analysts are forecasting adjusted diluted EPS to come in at $3.27 for the current quarter, beating even the low end of Lululemon's internal projection. In each of the previous four quarters, the company's earnings have actually exceeded consensus estimates from Wall Street. That's a great trend for shareholders to acknowledge.
While supply chain issues in the economy can result in higher costs and a challenging operating environment, Lululemon so far has proven that it can successfully navigate the situation. The business could very well surprise investors to the upside when it reports on March 29.
