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Lululemon shares plunge 16% on weak forecasts, slowing growth in North America

Shares of Lululemon plunged on Friday after the sportswear retailer issued disappointing guidance and said it was seeing weak sales in the U.S., its biggest market.

The retailer reported holiday earnings Thursday evening that beat expectations, but showed its growth in North America was stalling.

Here’s how the company performed in its fiscal fourth quarter compared to Wall Street’s expectations, based on an analyst survey from LSEG, formerly known as Refinitiv:

  • Earnings per share: $5.29 vs. $5.00 expected
  • Revenue: $3.21 billion vs. expected $3.19 billion

The company’s reported net income for the three-month period ended Jan. 28 was $669.5 million, or $5.29 per share, compared with $119.8 million, or 94 cents per share, a year earlier .

Revenue rose to $3.21 billion, up about 16% from $2.77 billion a year ago.

Lululemon shares closed about 16% lower on Friday. As of Friday’s close, shares are down about 21% this year and have significantly underperformed S&P 500which has increased by about 10% during this time.

Like its competitors, Lululemon is grappling with uncertain demand and a slowdown in consumer spending that has hit the apparel sector particularly hard. Investors have been watching how Lululemon fares in North America, its top-selling region, as the company performs tougher year-over-year and competes with consumers who value experiences more than goods like clothing and shoes.

During the quarter, sales in the Americas grew 9%, compared to 29% growth in the year-ago period. While Lululemon is still growing in the region, the pace has slowed significantly as Lululemon focuses on international expansion.

“As you have heard from others in our industry, U.S. consumer behavior has changed recently, and we are off to a slower start to the year in this market,” CEO Calvin McDonald said in a call with analysts Thursday. “We view this as an opportunity to continue to go on the offensive as we focus on investments that continue our growth trajectory. Outside the U.S., our business remains strong.”

McDonald added that both traffic and conversions are down in the US. He attributed this to a lack of products in sizes 0 to 4, the key sizes for the U.S. customer base, and not enough colorful items.

Meanwhile, international sales reportedly rose 54%, with sales in China up 78% and Lululemon’s remaining markets up 36%.

According to StreetAccount, comparable sales rose 12% during the quarter, falling just short of the 12.3% increase analysts had expected.

For the current quarter, Lululemon expects net sales to be between $2.18 billion and $2.20 billion, representing growth of 9% to 10%. According to LSEG, analysts expected a forecast of $2.25 billion, or growth of 12.5%.

According to LSEG, diluted earnings per share are expected to be between $2.35 and $2.40, below analysts’ expectations of $2.55.

For the full year, LSEG said revenue is expected to be between $10.7 billion and $10.8 billion, compared with estimates of $10.9 billion.

Diluted earnings per share for the year are expected to be between $14 and $14.20, compared with estimates of $14.13, according to LSEG.

Lululemon has long been a leader in women’s activewear, but the Vancouver-based company is facing more competition than ever. Newer entrants like Alo Yoga and Vuori have denied market share to Lululemon, and the company has had to work harder to stand out in the crowded category.

The retailer has been working to expand its footwear offerings and expand its men’s business. During the quarter, the company opened its first men’s store in Beijing – a key growth market for the company. In February, the company introduced its first men’s sneaker, CityVerse, and plans to introduce new running models for men and women as performance sneakers continue to be a bright spot in an otherwise stagnant footwear market.

Looking ahead to the holidays, McDonald said Black Friday was the “biggest day” in the company’s history and he was “encouraged” by the trends he saw early in the season. But the retailer’s outlook for the holiday quarter fell slightly short of analysts’ expectations.

In January, the company raised that forecast after finding that sales were “balanced across channels, categories and regions,” Chief Financial Officer Meghan Frank said in a news release.

Read the full earnings release Here.

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