Lululemon stock is down 13% today: buy the dip?

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Lululemon Athletica Inc (NASDAQ: LULU) opened more than 10% down on Friday after the athletic apparel retailer reported weaker-than-expected profit for its fiscal third quarter.

Is that a signal to sell Lululemon stock?

Part of why the stock is in the red may be that investors expected more in terms of guidance for the traditionally strong holiday quarter.

Lululemon forecasts its revenue to fall between $2.605 billion and $2.655 billion in Q4 on $4.20 a share to $4.30 a share of adjusted earnings. In comparison, analysts were at $2.655 billion and $4.28 a share, respectively.

But that isn’t worrisome per se for the retail stock, said Stacey Widlitz of SW Retail Advisors this morning in a CNBC interview.

I think there’s a sense of let’s set the expectations low, let’s reset the bar. It’s a smart thing to do going into such an uncertain holiday season. But so far, in terms of their business, price points, no mark down – I think the story is very much intact.

What about the inventory levels?

Lululemon ended its third financial quarter with inventories up 85% on a year-over-year basis – a sharp increase but one that the management is comfortable with. In the earnings press release, CEO Calvin McDonald said:

Our inventory levels were too lean last year and we made strategic decision to build inventories this year, which enabled strong top-line growth. We believe our inventories are well-positioned to support expected revenue growth in Q4.

Wall Street recommends that you buy Lululemon stock on the weakness and sees upside in it to $397 on average.

Lululemon Q3 financial highlights

Earned $735 million versus the year-ago $541 million
Per-share earnings climbed from $1.44 to $2.00
On an adjusted basis, EPS came in at $1.62
Revenue jumped 28% year-on-year to $1.90 billion
Consensus was $1.97 a share on $1.81 billion revenue

What else was noteworthy?

According to Lululemon Athletica, its comparable sales were up 22% this quarter versus a 19% increase expected. Widlitz added:

There’s absolutely nothing wrong with demand there. Traffic in stores was up 25% this quarter. Those are crazy numbers considering what rest of retail is doing. There are very few promotions [and still] they’re gaining market share.

The Canadian multinational had the “best day ever” this Black Friday that’s also in contrast with signs of weakness at most of the other retailers.

For the year, Lululemon stock is down nearly 20% at writing.

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