What happened
Shares of Lululemon Athletica (LULU 1.31%) dropped on Monday morning after the company released some updates regarding its business performance in the fourth quarter of 2022. As of 10:15 a.m. ET, Lululemon stock was down 9%.
So what
Along with the management teams of more than 150 public companies, Lululemon's management is participating in the ICR Conference, which begins today. Since analysts will likely be prodding management about recent trends with the business, it made sense for Lululemon to publish information for all shareholders on its investor relations website.
The update wasn't all bad. Q4 revenue is still being tallied. But management expects a 25% to 27% year-over-year increase compared with the fourth quarter of 2021. Moreover, its updated diluted earnings per share (EPS) guidance is still within management's previous guidance range. And its updated EPS guidance of $4.22 per share to $4.27 per share represents a 26% to 27% increase from Q4 2021.
However, the update wasn't all good, either. Specifically, Lululemon's management noted that gross margin has dropped by about 1 percentage point, which is substantial. It seems this is what the market was reacting to today.
Now what
Lululemon isn't the only company struggling with the holiday quarter. But I would contest that the market is overreacting to its Q4 results, which might make this an opportunity for investors.
Consider that while gross margin was dropping, Lululemon was still able to grow EPS. And it did this largely by outperforming its expectations when it comes to selling, general, and administrative (SG&A) expenses.
With macroeconomic conditions like inflation, it can be hard to maintain control over gross margin over a short time period. SG&A is more within a management team's control, in my opinion. Therefore, I'd say Lululemon's management is performing admirably despite the challenges.
