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Lululemon Athletica (NASDAQ: LULU) stock fell 13% on Wednesday after the company reported disappointing third-quarter results that showed that not even the best brands can enjoy strong growth forever.
The maker of fashionable yoga gear, in fact, did grow its business in the third quarter. Revenue grew 14% to $479.7 million. But the company’s comparable-store sales grew by a considerably smaller 9% and operating income fell 16%.
As if those numbers from the Lululemon earnings report weren’t bad enough, the company forecast more troubles ahead and lowered its fourth-quarter earnings guidance.
Lululemon noted the start of the fourth quarter had been mixed, with a trend of lower traffic that started in the final weeks of the third quarter continuing into the start of the fourth quarter.
Lululemon Earnings Reflect Continuing Slowdown
These are not the trends that any consumer retail business wants to show in the weeks leading up to the critical Christmas shopping season, but for Lululemon, these latest quarterly results are continuing and extending a slowdown that started much earlier in the year.
Back in September when the company reported second-quarter results, Lululemon stock fell sharply after it reported that sales grew but inventories also increased, a possible sign of a slowdown in business. And the quarter before that was similar: a rise in sales but a modest decline in operating income.
Earlier this year Lululemon stock traded just shy of $70 and its price-earnings ratio topped 40. After this most recent Lululemon earnings report, the stock dipped to $45.31 a share, with the P/E ratio falling to around 24.
Growing Sales by Sacrificing Income
While Lululemon stock is now down more than 17% year-to-date, it’s really still not so cheap for a company that seems to have lost its balance.
Looking over the past several quarters that have shown reasonably strong revenue growth and weaker income numbers, it appears the company may be sacrificing income to grow sales.
Investors would be wise to steer clear of this stock until the company can show how it plans to grow its bottom line.
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