LULU

Fears of a Doomed Consumer Economy Are Sending These 2 Stocks Lower

Stock markets looked poised to ease lower on Friday morning, as a combination of earnings news and economic data made some investors question their bullishness from November. Strong jobs data and a falling unemployment rate could lead the Federal Reserve to keep interest rates higher for longer, and that's directly contrary to the thesis on which many market participants have based their recent bullishness. Stock index futures were down as much as half a percent in premarket trading.

Retail stocks also added to anxiety levels. Both Lululemon Athletica (NASDAQ: LULU) and RH (NYSE: RH) saw their shares decline early Friday as shareholders parsed their respective quarterly financial results. Are they signaling an inevitable recession because of consumer weakness? Here's what the two companies had to say about it.

Lululemon bends but doesn't break

Shares of Lululemon Athletica were down 3% in premarket trading Friday morning. That was less sharp of a decline than the athletic apparel retailer's stock suffered in the immediate aftermath of its release of quarterly financial data late Thursday afternoon, but it still reflected wariness among those watching the upper end of the retail industry.

There wasn't much to be disappointed about in Lululemon's results for the fiscal third quarter that ended Oct. 29. Revenue climbed 19% year over year to $2.2 billion. Comparable sales were up 13%, with retail store comps gaining 9% and direct-to-consumer revenue jumping 18% from year-ago levels. Margins improved and adjusted earnings jumped 27% to $2.53 per share.

Moreover, Lululemon's guidance for fiscal 2023 as a whole improved. The company now sees sales of between $9.549 billion and $9.584 billion, a slight boost from the $9.51 billion to $9.57 billion that Lululemon projected previously. Adjusted earnings are likely to come in at $12.34 to $12.42 per share, up $0.25 to $0.32 per share from predictions three months ago.

CEO Calvin McDonald made a couple of broader comments casting light on macroeconomic conditions in the retail industry. Although Lululemon's product assortment has worked well, McDonald sees some signs of a broader pullback in apparel shopping, particularly in the men's product lines. Even though some had wanted to see a big boost in guidance for the holiday season, Lululemon still has high expectations that the consumer will keep rewarding its emphasis on quality and innovation.

RH is still waiting for a turnaround

RH suffered a bigger decline in its stock price, with shares trading down 10% early Friday. The high-end home furnishings retailer's fiscal third-quarter results for the period ended Oct. 28 showed continued weakness, even as RH seeks to keep expanding the scope of its business.

The headline numbers for RH weren't pretty. Revenue sank nearly 14% year over year to $751 million. Margins plunged, causing RH to post an adjusted loss of $8 million compared to its $110 million in adjusted net income in the prior-year period. Losses of $0.42 per share were worse than most investors had expected.

CEO Gary Friedman pointed to a number of factors hurting RH, including high mortgage rates and geopolitical tensions in the Middle East. A highly promotional environment in home furnishings has made shoppers shift toward clearance items, and RH therefore has chosen to delay its Modern Sourcebook catalog mailing until beyond the holiday season. Yet that's not stopping RH from spending to expand its platform and acquire real estate.

Friedman remains hopeful that the first half of fiscal 2024 will bring a notable comeback in demand. With new collections coming out, RH is seeking to transform its entire brand. It can only hope that consumers will still be ready to spend when that happens.

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Dan Caplinger has positions in Lululemon Athletica and RH. The Motley Fool has positions in and recommends Lululemon Athletica. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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