Lululemon shares tank as earnings show inventory at sky-high levels

Lululemon Athletica, Inc. shares closed down 16.4% on Thursday, after the company’s second-quarter earnings beat Wall Street estimates but alarmed analysts by showing inventory at a sky-high level.

“Holy inventory, Batman!” was how Wolfe Research responded to the report.

The yoga wear maker reported net earnings of $47.7 million, or 34 cents a share, compared with $48.7 million, or 33 cents per share, for the same period last year, a penny ahead of the FactSet consensus estimate. Revenue increased 16% to $453 million, and was also ahead of the FactSet consensus of $445.5 million. Comparable sales, which includes both same-store sales and direct to consumer sales, increased 11%.

However, Lululemon  reported an inventory total of $280.6 million at the end of the second quarter, 55% higher than the end of the second quarter of 2014, according to Chief Financial Officer Stuart Haselden. He said delays at West Coast ports caused by a labor dispute were largely to blame, an issue the company had highlighted on its previous earnings call.

“As a reminder, we identified opportunities to reflow approximately two-thirds of the late arriving inventory into our second-half assortments at full price with little incremental markdown risk,” he said. “The remaining third will be sold down through our normal exit channels, which includes our outlet stores, online warehouse sales, and physical warehouse sales.”

Lululemon raised its revenue outlook for fiscal 2015 to $2.025 billion to $2.055 billion from a prior $2.0 billion to $2.05 billion.

Wolfe Research said Lululemon’s negative sales-to-inventory spread is “one of the largest negative spreads we have seen since beginning our analysis in 2008.”

However, management plans to integrate about two thirds of the inventory without markdowns, was a positive, analysts wrote in a note.

D.A. Davidson & Co. was more pessimistic.

“Although Lululemon remains confident in the long-term potential to improve merchandise/gross margin, multiple headwinds continue to hinder near-term performance,” the firm wrote in a note. “With significant inventory to work-through in the second half, we believe gross margin performance remains a risk to second-half results.”

D.A. Davidson reiterated its neutral rating and lowered its price target to $62 from $69.