Lululemon Athletica, Inc. saw fiscal first-quarter revenue growth come modestly ahead of expectations, while EPS came in with an even stronger performance. That was enough to excite Wall Street and get LULU shares moving in the right direction after the market closed on June 5.

While the active lifestyle industry and Wall Street may see Lululemon as one of the Big 2, along with Nike in performance, when listening to company CEO Calvin McDonald talk about the LULU business on a conference call with analysts, it sounds like the brand is still one of the better-kept brand secrets outside of Canada. This reality provides the brand with a significant runway for additional growth.

It wasn’t long ago that the market was ready to write off Lululemon as new challenges befell Nike, and LULU had its issues to address, including the recent departure of Chief Product Officer Sun Choe for a new opportunity to run the Vans brand for VF Corp.

The bottom line is that the first quarter could have been better for established active lifestyle brands and retailers, but LULU looks to remain included in the same breath with On, Hoka, Vuori, and other next-gen brands leading in growth and brand admiration.

Lululemon’s first-quarter sales increase 10 percent year-over-year to $2.2 billion, or an 11 percent increase in constant-dollar terms. Comparable sales increased 6 percent, or 7 percent on a constant-dollar basis, for the first quarter.

Americas net revenue increased 3 percent or 4 percent on a constant-dollar basis in the first quarter. Americas region comparable sales were flat year-over-year.

Addressing the U.S., McDonald said the company saw a slower start to the year due to several internal factors, including a missed opportunity in women’s and bags, which he said it was actively addressing, and ongoing choppiness in today’s consumer environment.

“Our men’s business maintained its momentum, driven by strong guest response to our innovations across performance, lounge and our ABC franchise,” McDonald said. “Our market share gains were strong in men’s in quarter one, and with unaided brand awareness of less than 20 percent in the U.S., our opportunity to continue to grow this business remains significant.”

McDonald said the company had not maximized the business in the U.S. in the first quarter due to several missed opportunities, including a color palette and its core assortment, particularly in leggings, that were too narrow.

“Where we had color, guests responded well; we just needed more as they are looking for additional choices,” he said. McDonald said the company is also out of stock in some smaller sizes and saw a fantastic response to newer bag styles, including its two-tone tote, but LULU “did not buy these styles with enough depth to fully capture the demand.”

International net revenue increased 35 percent, or a 40 percent increase on a constant-dollar basis, in Q1. International comparable sales increased 25 percent year-over-year, or 29 percent growth on a constant-dollar basis.

China Mainland increased 45 percent on a reported basis, or 52 percent in constant currency, with comparable sales increasing 33 percent.

Rest of World (ROW) revenue grew by 27 percent on a reported basis, or 30 percent in constant currency, with comparable sales increasing by 26 percent.

“Our business remains strong in every international market in which we operate as our brand resonates with guests across regions and geographies,” McDonald shared. “Our approach to growth follows the model we’ve implemented so successfully in North America and includes omni-channel distribution via highly productive stores and e-commerce sites, a product assortment that offers technical and versatile styles and is frequently updated with new innovations to enable our guests to sweat in any way they choose and a unique and compelling approach to building brand awareness, which includes local activations as well as larger-scale brand campaigns.”

McDonald said that international business remains under-penetrated and represents “a significant growth opportunity. “For the full year 2023, International was only 21 percent of our business, and over the long run, I see the potential for it to grow to 50 percent as we continue to expand our presence outside of North America,” he forecasted.

Channel Highlights
Store channel total sales increased 12 percent in the quarter. LULU ended the quarter with 711 stores worldwide. Square footage increased 14 percent compared to last year, reportedly driven by the addition of 49 new Lululemon stores since Q1 of 2023. During the quarter, LULU completed three optimizations.

Digital channel revenue increased 8 percent in Q1 and contributed $906 million to the top line, or 41 percent of the total revenue.

Category Highlights
By merchandise category, Women’s increased 10 percent, Men’s increased 15 percent, and Accessories remained positive, up 2 percent, which the company said was impressive given the solid performance in Q1 last year.

Mexico Operations
Company CFO Meghan Frank gave a quick update on the company’s acquisition of its Mexico operations.

“In May, we signed an agreement with our franchise partners to acquire their Lululemon Mexico operations and the 15 retail locations they currently operate,” she revealed. “Our partner has built an incredible foundation for our brand in Mexico, and our acquisition will allow us to more efficiently continue to expand, grow our community and enhance the guest experience.”

Frank said LULU is acquiring the business for approximately $160 million in cash, and the deal is expected to close in the next several weeks, subject to customary closing conditions.

“From a P&L standpoint, we expect the transaction to have an immaterial impact on our financial results for the fiscal year 2024,” she noted.

Income Statement
Gross profit increased 11 percent to $1.3 billion, with gross margin improving 20 basis points to 57.7 percent of net sales in the Q1 period.

Income from operations increased 8 percent to $432.6 million and operating margin contracted 50 basis points to 19.6 percent of net sales.

The effective income tax rate for the first quarter of 2024 was 29.5 percent compared to 29.1 percent for the first quarter of 2023.

Diluted earnings per share were $2.54 compared to $2.28 in the first quarter of 2023.

In addition, LULU repurchased nearly $300 million of stock in the first quarter, an additional $230 million in the second quarter thus far, and the board recently increased authorization by $1 billion, bringing capacity to repurchase shares up to approximately $1.7 billion.

Balance Sheet Highlights
The company ended the first quarter of 2024 with $1.9 billion in cash and cash equivalents, and the capacity under its committed revolving credit facility was $393.8 million.

Inventories at the end of the first quarter of 2024 decreased 15 percent to $1.3 billion compared to $1.6 billion at the end of the first quarter of 2023.

Outlook
Second Quarter

In the second quarter, Lululemon expects net revenue to range from $2.40 billion to $2.42 billion, representing a 9 percent to 10 percent growth, roughly in line with the Q1 growth rate. “Our guidance for the full year continues to call for revenue growth of 10 percent to 11 percent, excluding the 53rd week, and includes a modest step-up in the second half,” said McDonald.

Diluted earnings per share are expected to range from $2.92 to $2.97 for the quarter, assuming a tax rate of approximately 30 percent.

“In summary, we are moving in the right direction and understand the root cause of the issues,” the CEO noted. “And with the lead times, we expect to be in a more optimal inventory position in the second half of 2024.”

McDonald said upcoming product launches and innovation flows are skewed toward the back half of the year, which is another reason for optimism.

“Looking out further, our growth opportunities in the U.S. remain compelling. Our unaided brand awareness is only in the low 30s,” he said.

Full Year 2024
For 2024, the company continues to expect net revenue to be in the range of $10.7 billion to $10.8 billion, representing growth of 11 percent to 12 percent or 10 percent to 11 percent, excluding the 53rd week of 2024.

“In 2024, our plan calls for five to 10 new store openings and 15 to 20 optimizations,” the CEO noted. “Looking beyond 2024, our real estate opportunities in the U.S. remain significant, and our plans include continuing our new store opening program and optimization strategy. And we continue to gain market share with outsized strength in men’s where we outpaced the overall market in quarter one.”

LULU continues to expect the operating margin for the year to be approximately 23.3 percent of net sales.

Diluted earnings per share are now expected to range from $14.27 to $14.47 for the year, assuming a tax rate of approximately 30 percent.

Product and Innovation Structure
McDonald also addressed Choe’s departure and walked through the succession plan and restructuring on that side of the business.

“Sun and I had been in regular conversations, so I understood her personal and career goals,” McDonald shared. “We regularly update our succession plans, which allowed us to seamlessly step into our new plan leadership structure. I’m excited about how the new structure will bring new perspectives, curiosity and leadership across our product teams. This approach will drive several meaningful benefits in the near and long term, including increasing our speed of innovation, stimulating creativity, and enhancing team accountability around product flows and assortment.”

McDonald said they have a strong and dynamic product team led by Jonathan Cheung, global creative director, who now reports to McDonald. Liz Binder, chief merchandising officer, now reports to Nikki Neuburger in her newly expanded role as chief brand and product activation officer. McDonald said that under Neuburger’s proven leadership, the merchant and the brand teams will be more fully integrated, which will streamline decision-making and ensure LULU shows up powerfully and consistently across all markets.

“All of this is intended to speed the ideation process with regard to product storytelling and further improve our speed-to-market,” he said.

“Jonathan, Liz and the entire product team will continue to drive innovation, design technical product that looks great, and solve for the unmet needs of our guests,” McDonald concluded.

Image courtesy Lululemon