<span style="color: #696969;">Lululemon Athletica, Inc.’s shares rallied on Friday after the retailer reported that traffic drove a 23 percent hike in same-store sales in the second quarter. Results easily topped analyst estimates, and guidance was lifted for the full year.

“While the external environment has been challenging, we see our guests respond strongly to our product innovations, our community activations and our omni-operating model, which allows us to meet and exceed their expectations,” said Calvin McDonald, CEO, on a call with analysts.

In the quarter ended July 30, earnings surged 39.1 percent to $289.5 million, or $2.26 a share, from $289.5 million, or $1.59, a year ago. Guidance had called for EPS in the range of $1.89 to $1.94.

On an adjusted basis, excluding the gain on the sale of an administrative office building, earnings rose 30.2 percent to $281.0 million, or $2.20, from $215.8 million, or $1.65, a year ago. Guidance had called for adjusted EPS in the range of $1.82 to $1.87, and Wall Street’s consensus estimate had been $1.87.

Net revenue increased 29 percent to $1.9 billion, ahead of Lululemon’s estimate in the range of $1.75 billion to $1.775 billion and Wall Street’s consensus estimate of $1.774 billion.

On a three-year basis, revenue increased 28 percent, accelerating from the 27 percent three-year CAGR in Q1, and adjusted EPS grew 32 percent.

“Based on our guidance, we anticipate a high level of performance to continue in quarter three,” said McDonald. “These results are even more compelling considering the difficult macroeconomic environment in which we operate.”

McDonald added that given the current macro backdrop, Lululemon had looked closely at customer data and metrics to identify shifts in spending patterns, behaviors or habits. He said, “To date, I’m pleased to show that we do not see any meaningful variation in cohort behavior or the metrics we track in this area of the business. New guest acquisition remains strong with transactions by first-time guests increasing over 20 percent in quarter two.”

Transactions by existing customers increased in the high teens. Store traffic rose over 30 percent on top of the 150 percent increase in traffic last year. Traffic to its e-commerce sites and apps increased globally to over 40 percent. On a three-year CAGR basis, traffic is up 8 percent in stores and over 40 percent in e-commerce.

McDonald added, “And, importantly, we are not creating this traffic through markdowns or price promotions. Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy, and we have no plans to do so. While we haven’t seen anything on our internal dashboards to suggest any changes, we continue to monitor our guest behavior closely and remain agile in how we plan the business.”

<span style="color: #696969;">Total comparable sales in the second quarter increased 23 percent, or 25 percent, on a constant dollar basis. Comparable store sales increased 16 percent, or 18 percent, on a constant dollar basis. DTC net revenue increased 30 percent, or 32 percent on a constant dollar basis. DTC revenue represented 42 percent of total revenue compared to 41 percent a year ago.

By region, revenue increased 28 percent in North America. International sales increased 35 percent versus last year and 40 percent on a three-year CAGR basis. International has helped by a rebound in China, growing 30 percent versus last year and nearly 70 percent increase on a three-year CAGR basis.

Gross profit increased 25 percent to $1.1 billion. Gross margin decreased by 160 basis points to 56.5 percent. Product margins were down 150 basis points due to an increase of approximately 130 basis points in airfreight related to supply chain challenges, slightly better than Lululemon’s guidance of 150 basis points. Markdowns were 30 basis points higher than Q221, given the low inventory levels and out of stocks last year. Relative to 2019, markdowns are flat. Foreign exchange reduced margins by 40 basis points, offset partly by 30 points of sale leverage on fixed costs.

SG&A expenses were reduced to 35.4 percent of revenue compared to 37.3 percent a year ago.

Adjusted operating income for the quarter was $391 million, up 30.7 percent from $299.2 million a year ago. As a percent of sales, adjusted operating income, improved to 20.9 percent from 20.6 percent.

Lululemon provided comparisons against the pre-pandemic second quarter of 2019 for a better measure of its progress. Versus the second quarter of 2019, net revenue jumped 112 percent, representing a three-year compound annual growth rate of 28 percent, gross margin increased 150 basis points, operating margin increased 250 basis points, and adjusted operating margin increased 190 basis points. Reported EPS of $2.26 and adjusted EPS $2.20 was more than double the EPS of 96 cents in the second quarter of 2019.

By category, on a three-year CAGR basis, men’s revenue increased 30 percent, women’s increased by 25 percent and accessories grew 50 percent.

Inventories at the end of the quarter vaulted 85 percent. On a unit basis, it increased 64 percent, representing a three-year compound annual growth rate of 38 percent, including two-percentage points for in-transit inventories. Lululemon believes company inventories are well-positioned to support its expected revenue growth in the third quarter.

McDonald said Lululemon sees some improvement within the supply chain, including factories in China catching up after pandemic-driven lockdowns, ocean delivery times improving but still elevated versus pre-COVID levels, and freight rates beginning to come down.

“In terms of inventory, we remain comfortable with both our quality and quantity, and we are well-positioned for the fall season,” said McDonald. “As you recall, for much of last year, we were under-inventoried and unable to maximize our business fully. This year, we are in a much better position to deliver product innovation to our guests wherever and however they shop with us. We remain in the early innings of our growth and have multiple levers to pull to continue our momentum, particularly when looking at product.”

<span style="color: #696969;">Elaborating on innovations, McDonald said that in Core categories, Lululemon launched SenseKnit, a proprietary fabric technology offering zone compression for runners. “Great success” was seen during the quarter in its Scuba and Define franchises for women and ABC and Commission franchises for men.

In Play categories, including its recent entry into golf, tennis and hike, the launch of the hike collection in the second quarter was strong. McDonald said, “We are thrilled by the early reaction to our hike collection with a strong response from both guests and the media.”

In footwear, the Blissfeel, launched in March, “continues to perform well,” helped by improved in-stock positions following the initial healthy launch. The Restfeel slide and Chargefeel training shoe for women were launched in the second quarter to a solid response.

“Looking forward, our pipeline of innovation remains robust, and I’m excited with what the teams have developed for the second half of the year, including a further expansion of apparel for run with new styles offering heat retention and reflective detailing to enable outdoor runs in cooler and low light conditions as the season shift,” said McDonald.

The hike category push will be amplified with “heavier styles to protect against the elements during cold weather outings.” The chain’s recent Throwback strategy will bring back the Unicorn Tears print in select styles. Said McDonald, “This print has not been available since 2012 and has been one of the most requested by our guests, and we’re thrilled to be bringing it back for a limited time. And finally, we’ll launch our fourth footwear style, Strongfeel, a technical training shoe designed to keep the foot anchored and secured during multidirectional training workouts.”

For the third quarter, revenue is expected in the range of $1.780 billion to $1.805 billion, up in the range of 19 percent and 20 percent from $1.5 billion a year ago. The guidance represents a three-year compound annual growth rate of approximately 25 percent. Diluted EPS is expected to be in the range of $1.90 to $1.95 for the quarter against adjusted earnings of $1.62 a year ago.

For 2022, the updated outlook calls for the following:

  • Net revenue in the range of $7.865 billion to $7.940 billion, representing a three-year compound annual growth rate of approximately 26 percent. Previous guidance called for revenue in the range of $7.610 billion to $7.710 billion;
  • Reported EPS in the range of $9.82 to $9.97 for the year, up from $9.42 to $9.57 previously; and
  • Adjusted EPS in the range of $9.75 to $9.90, up from $9.35 to $9.50 previously.

Photo courtesy Lululemon/SenseKnit