Wall Street analysts were embarrassing themselves all over the Lululemon earnings call

Guys, we’ve talked about this.

After missing analysts’ earnings estimates by one penny, Lululemon CEO Laurent Potdevin extolled the virtues of his company’s new loose tops for layering and its menswear strategy. He sounded excited about opening 18% more square footage of stores over the quarter, and praised his company for being “channel agnostic.”

It was a lovefest, and the only people more excited on the call than the CEO were the analysts. At least twice during the call, Potdevin’s optimistic rundown of the company was met with an even more enthusiastic “great quarter… really challenging environment… really challenging… great quarter” from Wall Street analysts.

Once upon a time, our Myles Udland highlighted a quote from SunTrust Robinson Humphrey analyst Eric Selle, who told Bloomberg that telling management they had a great quarter is “like everyone getting a medal in soccer … It’s the most embarrassing thing to say as an analyst.”

It’s even more embarrassing because the biggest problem with Lululemon — high inventory levels cutting into gross margins — are still very much out there.

A story about tops

While topline sales growth grew, thanks in part to the fact that Lululemon opened more stores, inventory levels also rose 21% to $286.2 million from 236.5 million at this same time last year.

That means more clothes are getting stuck in Lululemon’s pipeline, depreciating in value and thinning margins. To deal with this, the company sold $39.2 million worth of discounted merchandise through pop up stores, warehouse sales, outlets and the like. Last year it sold $25.8 million.

To help with that process, over the last year the company has also opened seven more outlets to “ensure liquidation capacity for our growing full price business,” according to CFO Stuart C. Haselden.

Later he mentioned that the company was going to keep focusing on inventories in order to “maintain the integrity of pricing.”

This is important, because price markdowns can change how customers view the entire Lululemon product. The store used to never have sales — it was a luxury product basically, and customers expected that.

But the reality of fast fashion and the intrusion of competitors into the athleisure market (Nike, Bandier, Beyonce) have changed all that. Lululemon has to keep up with trends and style changes. That means its inventory pipeline has to speed up, and it has — the company has a whole team on it, and Potdevin gave them a nice shout out on the call too.

That speed, though, means that older clothes that are depreciating in value have to be sold off even faster.

“They sell fashion and in season goods,” said Macquarie retail analyst Laurent Vasilescu in a phone call with Business Insider. “That puts you in the markdown business.”

Whether Lululemon likes it or not.

The spirit of the quarter

To be fair, Lululemon did have an an ever-so-slight increase in gross margins. But that was caused by cost cutting, and would have been healthier if it weren’t “offset with higher markdowns compared to Q1 as final steps to complete the rebalancing of our inventories,” as Haselden said on the call.

So when will we see more?

All Potdevin could say was that the company’s “return to gross margin growth” would be “taking shape in Q2” — which should probably sound familiar to anyone who’s been watching the stock for the last 13 quarters or so.

But hey, Lululemon has managed to keep it’s stock price up, partly through $432.2 million in share buybacks, while lowering its capex spend.

So maybe that’s what a “great quarter” is really about.

NOW WATCH: Don’t walk into an interview at Goldman Sachs without doing this first

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.