Shares of Lululemon are aligned to start trading up 15 percent after the yoga-themed retailer defied inflationary pressures by reporting better-than-expected first-quarter results and lifting its full-year outlook. China stood out, with sales up 79 percent, but the core business continued to see strength, with North American sales ahead 17 percent and its women’s leggings category growing by 22 percent.
Sales, gross margin, SG&A, EPS, and inventory all came in better than guidance. The sales growth was balanced across category, channel and region, and the earnings beat was boosted by lower air freight.
“We continue to engage with guests across the globe and drive our business with new and innovative technical products,” said Calvin McDonald, CEO, on a call with analysts.
Meghan Frank, CFO, said, “Guests responded well to our spring merchandise assortment, we saw sales trends accelerate in Greater China, and we connected with our guests via multiple activations throughout the quarter.”
In the quarter, revenues grew 24.0 percent to $2.0 billion, exceeding company guidance in the range of $1.89 billion to $1.93 billion. Wall Street’s consensus estimate had been $1.92 billion. Lululemon ended the quarter with 662 stores. Square footage increased 22 percent versus last year, driven by the addition of 83 net new Lululemon stores since Q122.
Net earnings jumped 52.8 percent to $290.4 million, or $2.28 a share, topping company guidance in the range of $1.93 to $2.00. Wall Street’s consensus estimate had been $1.96.
Same-Store Sales Gain 17 Percent Currency-Neutral
Total comparable sales climbed 14 percent, or 17 percent, on a constant dollar basis.
By channel, comparable store sales increased 13 percent, or 16 percent, on a constant dollar basis. DTC net revenue increased 16 percent, or 18 percent, on a constant dollar basis. DTC represented 42 percent of total revenue compared to 45 percent a year ago. Traffic in both stores and online increased by approximately 30 percent. Frank said, “This speaks to the strength of our omni-operating model as we engage with our guests in ways most convenient to them.”
By region, net revenue increased 17 percent in North America and increased 60 percent internationally.
By category, women’s was up 22 percent, men’s advanced 17 percent, and accessories, its smallest category, surged 67 percent.
Gross Margins Jump 360 Basis Points
Gross margins expanded 360 basis points to 57.5 percent. The improvement was driven by a 430 basis point increase in product margin, resulting predominantly from lower airfreight and regional mix.
Markdowns were in line with last year, and occupancy and depreciation leveraged 10 basis points in the quarter. These factors offset foreign exchange deleverage and costs related to ongoing product development and supply chain investments.
SG&A expense grew 22.3 percent due to investments in long-term growth opportunities but was reduced as a percent of sales by 30 basis points to 37.4 percent. SG&A came in better than expected due to leverage on higher-than-planned sales and, to a lesser extent, a shift in the timing of certain investments.
Income from operations surged 54.2 percent to $401.4 million, with operating margins expanding 400 basis points to 20.1 percent.
Inventories at the end of the quarter jumped 24 percent, matching the net revenue gain in the quarter. Frank said, “We remain comfortable with our inventories, and we’re well positioned to continue to fulfill guest demand. At the end of Q2, we expect inventory growth of approximately 20 percent. And we continue to expect inventory growth to be relatively in line with sales growth in the second half of 2023.”
Community Activations Back To Pre-COVID Levels
McDonald said Lululemon saw a “meaningful increase” in the number of community events in the quarter year-over-year, bringing it back to pre-pandemic levels.
Key celebrations in the quarter included its Align Haul Pass event held at universities. The six haul events held in three cities in Houston, Chicago and Boston were “hugely oversubscribed.”
On May 6 and 7, Lululemon held its first Align Legging Dupe Swap in Los Angeles, letting consumers trade in their leggings from competitors for Lululemon’s popular Align pants.
“For us, the primary purpose of this event was the new guest acquisition and increasing brand awareness for being the original in leggings,” said McDonald. “Overall, it was a resounding success. It generated more than 1 billion earned media impressions and was covered by national and international media outlets in addition to creating viral social media buzz. About 50 percent of the guests who traded in dupes are new to our brand. Approximately half of the guests who attended, some of whom started waiting in lines as early as 3 a.m., were under 30 years old.”
On May 23, Lululemon announced a program called “Further,” dedicated to promoting and better understanding the potential of women in endurance sports. Further will end with a multi-day women’s-only ultra-marathon starting on International Women’s Day 2024.
Lululemon relaunched the Lululemon Studio digital app earlier this week, offering U.S. consumers access to workout content for $12.99 per month without purchasing Lululemon’s Mirror-connected device.
In late March, Lululemon announced a change to its membership program, launched in October 2022; simultaneously, it took a massive impairment charge for the Mirror business. Lululemon said its free Essentials membership tier continues to see “very strong momentum” and enables the retailer to gain insights into customers’ needs and engage with them.
“We view our community model as one of our biggest competitive advantages,” said McDonald. “With connection points across both the physical and digital, our ecosystem powered by membership supports our leadership position in developing and cultivating omni-guest relationships. We engage with guests in ways that are more than just transactional by creating deeper connections and more holistic relationships; this, in turn, builds our brand awareness, drives purchases and contributes to our strong financial performance.”
Key Franchises Drive Category Gains
Across categories, the women’s gain was driven by continued strength in key franchises, including Scuba, Define and Align. Women’s bottoms, its most mature category, expanded by 22 percent, boosted by updates and new fabric technologies. Standout styles included
- Dance Studio pants that have seen a resurgence in popularity;
- the latest additions to its Align franchise, including the Mini-Flare and Wide-Leg; and
- its Softstreme bottoms.
In men’s, ABC, Commission and Pacebreaker franchises led the gains. In accessories, belt and crossbody bags, backpacks and duffle bags saw strong demand. In footwear, an updated Blissfeel running shoe was released, and the Blissfeel Trail, Lululemon’s first road-to-trail running shoe, was launched.
Addressing sustainability initiatives, McDonald said Lululemon’s Be Planted initiative is driving product changes in support of its 2030 goal to make 100 percent of products with sustainable materials and end-of-use solutions. A collaboration with Geno, a specialist in sustainable materials, resulted in a capsule, and a partnership was formed with Samsara Echo, an Australian startup that uses enzyme-based tech to recycle plastics to support further Lululemon’s circularity goals further.
China Recovery Stands Out Internationally
The 60 percent growth internationally was driven by China, which saw 79 percent growth in the quarter, accelerating from 30 percent growth in the fourth quarter and ahead of expectations.
“I had a chance to visit Shanghai in mid-April for the first time in three years, and it was great to see how much our brand has grown in the city,” said McDonald. “We walked through the neighborhoods we serve, visited our new stores, and I was impressed by the incredible brand experiences we are bringing to the local community. In addition, spending time with our educators as they engage with guests and bring our culture to life is always one of my favorite parts of being in the market.”
In EMEA, where Lululemon launched last fall, is off to a “great start.” Israel recently became Lululemon’s 24th market globally through a franchised partner with a store in Tel Aviv. Said McDonald, “We know that the Israeli guest has been engaging with our brand while traveling to other regions, and now we’ll be able to bring our product innovation and community and guest experiences directly to them in their home market.”
In APAC, “business remains robust as well,” said McDonald. Lululemon in coming months will enter Thailand with a store in Bangkok. Overall, Lululemon plans to quadruple its business outside North America between 2021 and 2026 as part of the Power of Three x2 plan.
“Our approach to increasing brand awareness and growing revenue internationally is rooted in the same tenets as what has fueled our success in North America,” said McDonald. “This includes our multichannel direct-to-consumer model, our community-based approach to brand building, our innovative product assortment and the deep and direct connections we have with our guests. I’m excited for what the future holds for our global business as we continue to execute the Power of Three x2 growth plan.”
For 2023, revenues are now expected in the range of $9.44 billion to $9.51 billion, representing growth of approximately 17 percent. Under its previous guidance, sales were expected in the range of $9.300 billion to $9.410 billion, representing growth of approximately 15 percent.
EPS is now expected to be in the range of $11.74 to $11.94 for the year, up 17.6 percent at the midpoint versus $10.07 a year ago. EPS had been expected in the range of $11.50 to $11.72, up 15.3 percent at the midpoint year over year.
For the second quarter of 2023, revenue is projected in the range of $2.140 billion to $2.170 billion, representing growth of approximately 15 percent. EPS is expected in the range of $2.47 to $2.52 for the quarter, up 13.4 percent at the midpoint against $2.20 a year ago.
Photo courtesy Lululemon