Lululemon stock falters on weak holiday quarter guidance, rising inventory

Yahoo Finance Live anchors discuss the decline in stock for Lululemon following quarterly earnings.

Video transcript

[AUDIO LOGO]

BRIAN SOZZI: Welcome back. We're just a few minutes away from the opening bell on Wall Street. But first let's hammer a few hot tickers here at Yahoo Finance. First up is belt bag hawker Lululemon. Shares are being put through the spin cycle on below consensus profit guidance for the holiday quarter. Seeing shares down 7.4% while one of the top tickers on our platform, Julie, really all because of a couple of reasons.

One, they offered up weak holiday quarter guidance. That full-year outlook about $0.10 below analysts' estimates. And two, something you and I were Slacking about this morning, inventory up 85% year over year. Now, they-- or their management team tried to downplay this on the earnings call last night. I-- and I would think we all-- I'll speak for you all, calling a bit of BS here because when your inventory is rising that much and you're not seeing sales rise accordingly, it's a huge red flag.

And I think Lululemon is trying to make the case, well, this is low markdown risk. This is in stretch joggers that people are going to wear no matter the season. But still, they're going to have to pack it away. It costs a lot of money to do that, red flag.

JULIE HYMAN: They also talked about how, a year earlier, they had unusually low levels of inventory. So that's one of the ways that they explained it. Oddly, it doesn't seem like analysts are that alarmed by that particular figure. But there are a couple of other things that I want to point out as well. One of them is gross margins.

Now, Lululemon is viewed as sort of best-in-class here or a higher-end retailer that's going to be fairly resistant to a downturn. So when it does have margins that come in lower than estimated, in this case at 55.9% versus 56.7% estimated, that is something that analysts are flagging as an area of concern here.

At the same time, if you look at total comps, we did see double digit increases in comps, which--

BRIAN SOZZI: Yeah, this wasn't Kohl's, right?

JULIE HYMAN: Right.

BRIAN SOZZI: It was a good quarter from a sales standpoint.

JULIE HYMAN: Right, exactly, exactly. So I'm looking at some of our friends of the show this morning and what they have to say about it. And Nisha Sherman over at Bernstein, who's looking at it, she says we're disappointed at the use of markdowns and margin investment to get to that growth that they saw. Simeon Siegel over at BMO, another friend of the show here, looking at that rare gross margin miss without making inventory headway. So he did flag that as an area of concern. I believe both of them have market performs on the stock, an equivalent of a hold rating.

BRIAN SOZZI: Simeon has a closet full of Lululemon gear, absolutely.

JULIE HYMAN: Don't you?

BRIAN SOZZI: Maybe I do. Yes, I do. But let me add this though, one of the biggest problems--

JULIE HYMAN: "Maybe"

BRIAN SOZZI: One of the biggest problems, I think, with Lululemon-- and they buried it-- well, not buried it, mentioned it in the earnings call to kick it off-- they have not raised prices. And I think we are now finally at that point where, how much further can Lululemon push through price increases? Some of these pants are now $130 a pop for basic leggings. Now, the quality is great. But that is a huge expenditure in an environment where a lot of athletic wear in this retail environment is being heavily, heavily discounted.

JULIE HYMAN: Well, that's why you know, as I always say, you can go to like new, the secondhand, remember?

BRIAN SOZZI: How's your luck? How's that? How have you done with it?

JULIE HYMAN: It's great.

BRIAN SOZZI: It's great, yeah?

JULIE HYMAN: We've talked--

BRIAN SOZZI: The stuff doesn't smell? It's just all right?

JULIE HYMAN: No, it doesn't smell! They wash it before they-- you buy it. Have you never bought anything secondhand?

BRIAN SOZZI: I'm still-- well, I bought cars. I've bought cars.

JULIE HYMAN: Clothing, you've never bought any secondhand clothing?

BRIAN SOZZI: Not that I can recall, no.

JULIE HYMAN: It doesn't smell.

BRIAN SOZZI: Really?

JULIE HYMAN: Does your clothing smell after you wash it?

BRIAN SOZZI: Yeah, but that stuff gets trapped in the fibers.

JULIE HYMAN: Does your clothing--

BRIAN SOZZI: Do I want to buy somebody else's used toothbrush?

JULIE HYMAN: That's completely different.

BRIAN SOZZI: Is it though, is it?

JULIE HYMAN: Yeah, it is.

BRIAN SOZZI: All right, well--