Published - January 9, 2023 @ 3:37 PM (EET)

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Sparking a sharp move lower in its shares in premarket trading, Lululemon Athletica Inc. (NASDAQ:LULU) tightened its fourth-quarter earnings forecast and increased its revenue target but warned it expects a drop in margins.

As the apparel maker grapples with increased costs amid a drop in consumer spending due to persistently-high inflation, the company said Monday it expects gross margin to decline 90 to 110 basis points.

Previously, the company expected an increase of 10-20 basis points. However, the company now predicts it will further leverage selling, general and administrative expenses by 100-120 basis points.

Elsewhere, Lululemon said it expects fourth-quarter revenue to be between $2.66 billion and $2.7 billion compared with its previous range of $2.61 billion and $2.66 billion.

WHY IT MATTERS

Recently, gross profit margins have been a standout, having risen to 56% of sales from 55% of sales a year ago.  

In an early December press release, CEO Calvin McDonald said,

"Our ongoing momentum is a testament to our innovative products, deep community relationships, and the hard work and dedication of our talented teams."

Earlier, analyst Ike Boruchow at Wells Fargo upgraded Lululemon's stock to Overweight and raised the price target from $360 to $360.

The analyst noted that the company's topline resilience over the past few years has been excellent, with 2022 earnings expected to double the 2019 levels.

The rating changes are part of Wells Fargo's attempt to reposition its retail portfolio ahead of an uncertain year for discretionary spending. 

Boruchow says that doesn't mean investors should bypass the retail sector altogether, highlighting a few tailwinds that could boost select stocks in 2023. He sees retailers making progress paring down excess inventories and believes that freight costs may also come down, helping companies expand margins.

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Before the market opened, Lululemon's shares were 12% lower after ending last week at $329.26. Over the past 12 months, the stock has fallen 7.3%.‍

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Price Target:  Based on 20 analysts' ratings covered by TipRank in the last three months, the stock is a Moderate Buy (15 Buys, 4 Holds, 1 Sell). The average price target of $405.80 implies an upside potential of $405.80.