Nike and Lululemon Send Major “Stagflation” Warning

Stocks struggled to find direction today, following a record-breaking session yesterday as investors grappled with the prospect of a reversal in interest rate hikes. The tech-heavy Nasdaq Composite, which opened the day in negative territory, managed to edge into the green by mid-afternoon, up about 0.1%. The Dow Jones Industrial Average, which has been flirting with the psychologically significant 40,000 level, slipped around 0.5%, while the benchmark S&P 500 remained flat.

Despite the mixed performance, all three major indexes are poised for solid weekly gains, having notched all-time closing highs after the Federal Reserve alleviated concerns that it might scale back its forecast for rate cuts this year. Optimism that borrowing costs have reached their peak is also riding high on indications that other major central banks are prepared to pivot.

Lululemon Athletica Inc. saw its stock plummet in premarket trading after the company’s first-quarter net revenue forecast fell short of Wall Street’s expectations. The athleisure brand attributed the underwhelming sales forecast to a slowdown in sales at its US stores. Furthermore, Lululemon revealed that its fourth-quarter adjusted earnings per share missed estimates, prompting analysts to revise their price targets downward.

In a conference call with analysts late Thursday, Chief Executive Officer Calvin McDonald reported that US customers purchased fewer items compared to the previous year. He acknowledged that customers “are a little soft coming into the year” but highlighted “strong momentum” at stores across all international markets, including Canada.

Lululemon’s outlook for 2024 projects revenue to be in the range of $10.7 billion to $10.8 billion, representing growth of 11% to 12%, which falls below the 19% recorded last year. The slowdown in sales has been observed across a wide variety of products. To boost sales, McDonald announced that the company would introduce new product colors and offer more yoga pants in sizes 0 to 4.

Shares of Lululemon in New York premarket trading plummeted by as much as 13% following the news.

Bloomberg Intelligence analyst Poonam Goyal noted that the yoga-wear maker typically provides conservative guidance and then surpasses those forecasts, stating, “They will beat their conservatively-set guidance. Plenty of opportunity exists — especially abroad and in men’s.”

For the first quarter, Lululemon expects net revenue to be between $2.18 billion and $2.2 billion, falling short of the Bloomberg Consensus estimate of $2.26 billion. The company also anticipates EPS to range from $2.35 to $2.40, lower than the estimate of $2.55.

Looking ahead to the 2025 fiscal year, Lululemon projects net revenue to be in the range of $10.7 billion to $10.8 billion, below the estimate of $10.96 billion. The company forecasts EPS to be between $14 and $14.20 for the year.

Wall Street analysts reacted positively to the report and mostly maintained their buy ratings on the stock, even though LULU’s losses spilled over and hit shares of other major retailers.

Athletic apparel retailer Nike didn’t help matters either when its shares dropped 6% in premarket trading amid reports of a sales squeeze, organizational restructuring, and a product transition phase. This, coupled with LULU’s disappointing guidance, may be the latest evidence that some consumers are feeling the strain of persistent inflation.

That’s stagflationary data, which is perhaps the worst possible kind of data for stocks. The dollar soared today in response which pushed hedge assets lower, like gold, which is now threatening a selloff after recently hitting new highs. In general, though, traders should really be paying more attention to the S&P, as the market is still not positioned well to absorb a selloff.

If the market finally does slip, we’re still in danger of a very rapid descent, which could easily shoot the beaten-down VIX higher, amplifying the damage suffered by bulls.


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