Lululemon Athletica, Inc. took a massive impairment charge in the fourth quarter to cover write-offs and the restructuring of its Mirror’s connected-fitness business. However, shares of Lululemon are up about 15 percent in -pre-market trading Wednesday as fourth-quarter results topped estimates and an upbeat outlook was provided for 2023.

On a call with analysts, Calvin McDonald, CEO, noted that fourth-quarter results came in ahead of the company’s January guidance update, its adjusted full-year results represented a “very solid start” to its Power of Three x2 growth plan, and the first quarter has seen “strength and momentum across the business so far.”

He added about the fourth quarter, “We managed the business very well through an environment that was highly promotional and our markdowns were only up a modest 40 basis points versus 2019. I am pleased that as we progressed out of the holidays and began to transition to new spring merchandise, regular price sales returned to our normal levels.”

Same-Store Sales Jump 27 Percent
In the fourth quarter ended January 29, revenue jumped 30.2 percent to $2.8 billion, topping Wall Street’s consensus estimate of $2.7 billion. On January 9, Lululemon updated its guidance, forecasting sales in the range of $2.66 billion to $2.7 billion versus guidance in the range of $2.605 billion to $2.655 billion given with third-quarter results.

By region, revenue in the quarter increased 29 percent in North America and 35 percent internationally.

Total comparable sales increased 27 percent, or 30 percent on a constant dollar basis. Comparable store sales increased 15 percent, or 17 percent on a constant dollar basis. DTC net revenue increased 37 percent, or 39 percent on a constant dollar basis. DTC revenue represented 52 percent of revenue compared to 49 percent for the fourth quarter of 2021.

McDonald noted that on a three-year CAGR basis, sales grew 26 percent. On a three-year basis, women’s was up 23 percent, men’s grew 26 percent, accessories were up 44 percent, company-operated stores gained 10 percent, e-commerce jumped 46 percent, North America sales grew 24 percent, and international jumped 39 percent. Said McDonald, “Our business continues to be well balanced across product category, channel and region.”

Gross Margins Impacted By Markdown Pressures
Gross margin in the quarter decreased 300 basis points to 55.1 percent. Adjusted gross margin eroded 70 basis points to 57.4 percent as higher markdowns, foreign exchange headwinds and investments in its product teams and distribution centers offset lower air freight expense. Adjusted gross margin was favorable to updated guidance, which called for a decline of 90 basis points to 110 basis points due predominantly to favorability in markdowns and air freight in addition to leverage from higher-than-planned sales.

Compared to 2019, markdowns were up 40 basis points, contributing to markdowns being relatively flat for the full year versus 2019, partly due to a 50-basis point benefit from foreign exchange.

SG&A expenses were reduced to 29 percent of revenue compared to 30.2 percent for the same period last year.

Income from operations decreased 47 percent to $314.4 million due to the Mirror charge. Adjusted income from operations advanced 33 percent to $785.3 million and adjusted operating margin improved to 50 basis points to 28.3 percent.

Earnings on an adjusted basis jumped 30.6 percent to $4.40 a share from $3.37 in the fourth quarter of 2021, besting Wall Street’s consensus estimate of $4.26. On January 9, Lululemon said EPS was expected in the range of $4.22 to $4.27 compared to the previous guidance range of $4.20 to $4.30. EPS on an adjusted basis grew 25 percent on a three-year CAGR basis.

Net earnings in the latest quarter came to $119.8 million, or 94 cents, down 27.6 percent from $434.5 million, or $3.36, a year ago. The latest quarter included after-tax impairment and other charges related to its Mirror connected-fitness business totaling $442.7 million.

In the year, revenue increased 30 percent to $8.1 billion or 32 percent on a constant dollar basis. Total comparable sales advanced 25 percent, or 28 percent on a constant dollar basis. Diluted earnings per share were down 10.8 percent to $6.68 compared to $7.49 in 2021 due to the charge. Adjusted diluted earnings per share rose 29.3 percent to $10.07 in 2022 compared to $7.79 in 2021.

Mirror Restructuring
The charges cover a shift in the Mirror business away from the hardware-centric business it acquired in 2020 to focus on an app-based model as Mirror sales during the holiday season came in below expectations. Under the updated program, Lululemon will continue to provide in-home hardware and content for members who own or would like to purchase a Lululemon Studio Mirror and currently there are no changes planned for the free, Essentials tier of the membership program which continues to experience robust growth in new members.

McDonald said, “Since our acquisition, the at-home fitness space has been challenging. While members love our content, hardware sales did not match our expectations. And even though our CAC (customer acquisition cost) has continued to improve, it has not improved enough to maintain the current level of investment.”

The new app will launch this summer at a lower monthly fee. The Studio tier involves a subscription costing $39 per month for unlimited workout classes and has a 12-month commitment with the purchase of a Lululemon Studio Mirror.

The changes come as sign-ups for the free tier of its membership program, Essentials, are significantly exceeding expectations. In the first five months, more than 9 million members have been enrolled with early results showing its membership program increases the frequency of customers engaging with the brand. For example, more than 30 percent of members have already participated in at least one of the benefits of the program and the engagement is expected to drive retention and incremental purchasing behavior going forward.

Lululemon expects the overall changes to its membership program to create efficiencies and enable more customers to experience the full range of digital fitness content, driving broader engagement.

“The new more efficient app-based model will launch this summer at a lower monthly subscription rate, and when combined with our 9 million and growing Essentials members will allow us to expand our total addressable market for potential members,” said McDonald. “We view Lululemon Studio in the same way we view any innovation. We test, we learn and we evolve as necessary. Although the acquisition has not fully materialized as originally intended, we’re in a much better position in our understanding of the community and our new membership program as a result.”

Market Share Gains
McDonald spent much of the call highlighting Lululemon’s broader strength in the marketplace. In the fourth quarter, Lululemon saw a nearly 30 percent increase in transactions by new guests and more than 35 percent increase in transactions by existing guests. For the full year, a mid-to-high 20 percent increase for both metrics.

McDonald noted that the adult active apparel industry decreased its U.S. revenue by 5 percent in the fourth quarter compared to the same period last year, but Lululemon over that time period gained 2.3 points of market share in the U.S., according to NPD. He said, “This is the highest quarterly market share gain we’ve achieved since we began tracking these numbers in 2020, and it caps a year in which we grew our market share every quarter. This speaks to our growth in the U.S., a key market within North America.”

Since last April, Lululemon has seen increases in awareness in some of its key growth regions. Five points of unaided awareness were gained in Australia from 19 percent to 24 percent; 2 points in China from 7 percent to 9 percent; and 2 points in the UK, to 16 percent. McDonald said, “Significantly more consumers in these regions are currently unaware of our brand compared to those who are, which highlights this meaningful opportunity.”

Regional Wins
By region, revenue increased 29 percent in North America and 35 percent internationally with the same growth rates experienced in the fourth quarter and year. In China, revenue in the fourth quarter increased more than 30 percent versus last year and over 50 percent on a three-year CAGR basis. McDonald said, “While COVID-19 impacted revenue in December, we had a strong finish to the quarter and have seen momentum accelerate in quarter one. We have a solid foundation in the region across our brick-and-mortar and digital channels and are supported by the exceptional talent on which we continue to build.”

McDonald said Lululemon is on pace to meet the goals of its Power of Three x2 growth plan that calls for a doubling of the business from 2021 net revenue of $6.25 billion to $12.5 billion by 2026. The goals include a plan to double men’s, double direct-to-consumer, and quadruple international revenue relative to 2021.

McDonald concluded, “In 2022, we passed $8 billion in revenue for the first time driven by balanced growth across categories, channels and markets. Our product pipeline driven by innovation is very strong. More than 9 million guests signed up for our Essentials membership program in the first five months, which further strengthens the opportunity to keep building our community, strengthen our guest relationship and drive long-term value. Our market share gains show our brand is able to expand and attract new guests and yet our unaided awareness remains low, which demonstrates the runway in front of us. And we’re seeing strong momentum in every market where we operate, and we continue to successfully expand into new geographies. These are just some of the reasons I’m excited about all that’s in front of us, both in 2023 and over the coming years.”

Outlook
Looking ahead, revenue in the first quarter is expected in the range of $1.89 billion to $1.93 billion, representing growth of approximately 18 percent. EPS is expected in the range of $1.93 to $2.00.  Wall Street’s consensus target had been $1.64 on sales of $1.85 billion.

For fiscal 2023, revenue is projected in the range of $9.300 billion to $9.410 billion, representing growth of approximately 15 percent. EPS is expected to be in the range of $11.50 to $11.72 for the year. Wall Street’s consensus target had been $11.26 on sales of $9.14 billion.

Photo courtesy Lululemon