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Shares of Lululemon (LULU-1.05%), the high-end leggings and “technical apparel” retailer, were down 20% before Friday’s market open, potentially shaving about $8 billion off its market cap.
That’s despite relatively strong quarterly results posted after Thursday’s close, in which CEO Calvin McDonald called out “growth across channels, categories, and markets, including the U.S.” Revenue grew 7% to $2.4 billion, and the growth held across each of the company’s major categories, women’s apparel, men’s apparel, and accessories.
Same store sales edged up 1%, while international sales climbed a healthy 20%, with 21% growth in China specifically, where it opened three new stores. Margins expanded as product costs sank and price tags rose. EPS rose modestly year over year.
‘The net impact of tariffs’
All in all, considering that Lululemon caters to high-income consumers willing to shell out $125 on a simple dress made of athleisure material – shoppers who are more immune to economic slings and arrows than, say, Dollar General’s or Target’s – that’s still a fairly good set of outcomes in this “dynamic macroenvironment,” in management’s phrasing.
So what’s the likely culprit behind the sinking share price? Revised guidance as management expects tariffs to drag on earnings in the second half of the year. Lululemon now predicts more modest profits in the second half of the year, with CEO McDonald saying on the call, “We did lower our op margin for the full year from 100 basis points decline year over year to 160. That’s all driven by the net impact of tariffs.”
Clothing retailers particularly impacted
Management’s comments and shifting forecast falls in line with Morgan Stanley (MS-1.00%) research suggesting that clothing retailers will struggle to cope with the effects of the White House’s trade wars.
“Businesses that primarily sell merchandise like clothing, footwear, home textiles and accessories, suppliers may have shared as much as 50% of any incremental tariff burden historically,” per an article on Morgan Stanley’s website. “But this time, retailers and wholesale brands may need to absorb more of that weight.”
Weigh on margins, that is.