Shares of Lululemon are tanking hard this morning after management announced
disappointing sales and earnings guidance.
The stock is down by over 10%.
So what’s happening?
Brian Sozzi of Belus Capital Advisors says the story can be explained in two charts.
“Outside of comps having peaked many quarters ago, Lululemon has not found a way to more efficiently and consistently develop its product to drive gross margin expansion relative to the comp slowdown,” he said in an email blast to clients.
When it DID try and develop its products a little cheaper, #SeeThroughGate reared its ugly head. That is why with increasing competitors attempting to replicate Lululemon’s success in a low barrier to entry industry (a strong social media community does not qualify as having a wide moat…), which is eating into market share (see in the comp trend), made it especially critical for the company to bring in a new CEO, as it did, with a deep operations background. The goal for him will not only be to reignite comps through new categories and global expansion, but to find ways to re-engineer the product to bring down costs and set gross margins back into expansionary territory (and then prepare them for another slowdown cycle well off into the future).
By #SeeThroughGate, Sozzi is referring to customer complaining that Lululemon’s yoga pants were see-through.
Sozzi doesn’t recommend investing in Lululemon.
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