Lululemon Stock Earnings: THIS Explains Why Shares Dropped | Summary and Q&A

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December 9, 2022
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Brian Feroldi
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Lululemon Stock Earnings: THIS Explains Why Shares Dropped

TL;DR

Lululemon's Q3 revenue and earnings per share exceeded expectations, but the negative free cash flow and high inventory build-up led to a decline in shares.

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Questions & Answers

Q: What were the main reasons behind Lululemon's decline in shares?

Lululemon's decline in shares was primarily due to the negative free cash flow and the high inventory build-up in preparation for the holiday season. The negative cash flow raised concerns about the company's ability to generate profits and meet customer demand.

Q: How did Lululemon's gross profit growth compare to its revenue growth?

While Lululemon's revenue grew by 28% in Q3, its gross profit only grew by 25%, indicating margin compression. However, it's important to note that the company's operating and net margins expanded due to an easy year-over-year comparison, mainly because there were no acquisition-related expenses this year.

Q: What strategies does Lululemon have in place to drive future growth?

Lululemon plans to double its total sales between 2021 and 2026 by focusing on product innovation, expanding its men's business, investing in the guest experience and direct-to-consumer business, and quadrupling international revenue, particularly in China.

Q: Why is Lululemon's free cash flow important?

Lululemon's negative free cash flow in Q3 raised concerns because it indicates that the company is not generating enough cash from its operations to cover its expenses and investments. Positive free cash flow is crucial for future growth, as it enables the company to invest, buy back stock, and fund expansion plans.

Q: How did Lululemon's guidance for the upcoming quarter impact its shares?

Lululemon's guidance for the upcoming quarter, expecting 23% revenue growth and 26% EPS growth, fell slightly below Wall Street's expectations. This led to a decline in shares as investors were disappointed with the outlook. However, the full-year results were still strong, with 27% growth on both the top and bottom lines, which partially offset the decline.

Summary & Key Takeaways

  • Lululemon's Q3 revenue reached $1.857 billion, beating estimates and showing a growth rate of 28%.

  • Earnings per share grew by 23%, exceeding expectations.

  • The company experienced negative free cash flow of $255 million due to a significant inventory build-up, but its balance sheet remains solid with $400 million in cash and no debt.

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