Lululemon Athletica overcame supply chain disruption and inflationary pressures to deliver first-quarter sales and earnings well past company targets, driven by outperformance in North America. As it’s done regularly over the pandemic, the yoga-themed retailer raised its outlook for the year.
On a call with analysts, Calvin McDonald, CEO, said revenue in the first quarter increased 32 percent versus last year and 27 percent on a three-year CAGR basis, while adjusted EPS grew 28 percent and 26 percent on the same basis.
“Several notable metrics underscore our performance this quarter,” said McDonald. “Starting with product, the guest response to our core and new merchandise remains very strong. Our product continues to drive demand, and we experienced robust traffic growth in both channels, with stores and e-commerce up approximately 40 percent.”
McDonald also said inventory, being up 74 percent year-over-year at the end of the quarter, is not a concern. McDonald said, “While our levels are higher than our historical norms, we are comfortable with the quality and composition of our inventory; this allows us to balance the momentum we’re seeing in the business with the challenges that remain within the global supply chain.”
He also elaborated on why Lululemon expects a minimal impact from the challenges currently facing China and overall inflationary pressures.
In the quarter ended May 1, revenue increased 31.6 percent to $1.6 billion, surpassing guidance that called for sales to be in the range of $1.525 billion to $1.55 billion. Net revenue increased 32 percent in North America and grew 29 percent globally.
Total same-store sales jumped 28 percent, or 29 percent on a constant-dollar basis. Comparable store sales increased 24 percent. DTC, or digital, revenue increased 32 percent, or 33 percent, on a constant-dollar basis.
On a three-year CAGR basis, total revenue increased 27 percent, an acceleration from Q4. In the store channel, sales increased 36 percent on a one-year basis and 13 percent on a three-year CAGR basis.
Productivity was above 2019 levels and continues to trend that way to date in Q2. In its digital channel, revenues increased 51 percent on a three-year CAGR basis and represented 45 percent of total revenue compared to 44 percent for the first quarter of 2021.
By category, men’s revenue increased 30 percent on a three-year CAGR basis, women’s increased 24 percent, and accessories grew 43 percent on the same basis.
In-store traffic increased over 40 percent in the first quarter year-over- year while traffic to e-commerce sites and apps globally increased by nearly 40 percent. On a three-year CAGR basis, traffic was up over ten percent in stores and nearly 40 percent in e-commerce.
Gross profit in the quarter climbed 24 percent to $870.4 million, although gross margin decreased 320 basis points to 53.9 percent. The lower gross margin was driven by a 370 basis point decrease in product margin. Q1 product margin included an increase of approximately 340 basis points in air freight, related to macro supply chain challenges, which was higher than the guidance of 300 basis points due to increased usage relative to initial plans. Markdowns were approximately flat with last year. Relative to 2019, markdowns decreased by 40 basis points. Lululemon also experienced ten basis points of deleveraging from foreign exchange. These negatives were partially offset by 60 basis points of leverage on fixed costs, driven by occupancy and depreciation.
SG&A expense was reduced to 37.7 percent of revenue, compared to 40.5 percent a year ago due to sales leverage.
Income from operations increased 34 percent to $260.3 million, or 16.1 percent of sales, from $193.8 million, or 15.8 percent, a year ago. Operating income was up 29 percent against an adjusted operating income of $201.5 million, or 16.4 percent, a year ago. The adjustments relate to the acquisition of Mirror and its related tax effects.
Net earnings grew 31.1 percent to $190 million, or $1.48 a share, from $145.0 million, or $1.11, a year ago. Earnings were up 25 percent versus adjusted year-ago earnings of $152.2 million, or $1.16. EPS of $1.48 topped company guidance in the range of $1.38 to $1.43.
Compared to the pre-pandemic first quarter of 2019, revenue increased 106 percent, representing a three-year compound annual growth rate of 27 percent. Gross margin against the first quarter of 2019 was consistent at 53.9 percent; operating margin decreased by 40 basis points. EPS of $1.48 compared to 74 cents in the first quarter of 2019.
At the end of the latest first quarter, inventories increased 74 percent to $1.3 billion compared to $0.7 billion at the end of the first quarter of 2021.
Meghan Frank, CFO, said Lululemon continues to strategically use air freight to help mitigate industrywide supply chain issues and support its top-line momentum, with these higher costs having an impact on inventory when looked at on a dollar basis.
On a unit basis, inventory increased 56 percent, representing a three-year compound annual growth rate of 36 percent, inclusive of five-percentage points for in-transit inventory. Franks said Lululemon believes its inventories are well-positioned to support its expected revenue growth in the second quarter.
The inventory levels also reflect shortages faced last year, with buyers planning receipts for this year to avoid excessive understocks. Core assortments comprise approximately 45 percent of the inventory mix. Frank added, “Looking forward, we expect to see the year’s highest one-year inventory growth rate in Q2 on both a dollar and unit basis before levels begin to moderate in Q3. In Q2, inventory dollar growth relative to last year will be modestly above levels at the end of Q1.”
Regarding the impact of China, McDonald said Lululemon sees a “modest impacts” on sales from the COVID-19-related lockdowns in its stores in China and with some of its vendors. Revenues grew double digits in China in the quarter and are up over 60 percent on a three-year CAGR basis. Growth plans remain on track, with 40 store openings this year planned for Mainland China. He said, “We remain excited about our business in China, and we view the current situation as short-term in nature.”
From a sourcing perspective, Mainland China represents only 4 percent to 6 percent of total unit volume, although “some level of impact on future receipts” for the upcoming fall season is expected when including include trims and other components emanating from China.
“When looking at the global supply chain, overall, the environment remains challenging, ocean lead times are not improving, and air freight costs remain high,” said McDonald. “To address these issues, our team carefully balances our business momentum with timeline uncertainties to help ensure we meet guest demands; this comes with a commensurate investment in air freight, which is important given we see satisfying guest demand as a priority. Our timelines allow us to pivot when we see trends change from air to ocean, and all costs are included in our guidance. We will continue to carefully assess and manage.”
On inflation, Lululemon is implementing some select price increases to offset increased input costs on raw materials, labor, and air freight but “have not seen any negative impact to our sales volume as a result.”
McDonald added, “Unlike many in the industry, we do not use promotional pricing as a lever to drive top-line sales. Therefore, we are very intentional with our pricing strategies, and we monitor guest responses accordingly. That said, I remain cautious around increasing prices in this period of uncertainty, and we will continue to monitor and maintain a measured approach toward this strategy.”
Broadly addressing Lululemon’s strong performance, McDonald said Lululemon continues to benefit from changes in behaviors coming out of the pandemic. He said, “These include our guests wanting to live an active and healthy lifestyle and looking for additional support related to well-being and recovery. And as normalcy returns, their desire for versatile apparel has increased.”
He also said Lululemon’s DTC model “provides a strong and direct connection” as well as direct access to consumer insights. However, he emphasized that product innovation that solves “the unmet needs of athletes” ultimately drives the brand’s appeal.
“Our product pipeline remains very strong, and it’s the bedrock of the business,” said McDonald.
In the first quarter, major launches including footwear, golf and tennis all met with a “great guest response.”
The launch of footwear designed “for women first” earned best women’s specific shoe in 2022 by Runner’s World and has led to out of stocks. McDonald said, “Although we expect to be in a better inventory position in the coming weeks, demand has far exceeded our sales forecast. As a result, we do anticipate that we will be chasing into additional inventory for the remainder of the year.”
The launch of golf and tennis “both performed well this quarter,” said McDonald. Both are comprised of pieces from our core assortment as well as styles designed specifically for the activities to support crossover sales. McDonald said, “We are pleased with these results and we’ll continue to lean into these strategies.”
For the second quarter, launches include SenseKnit, its newest fabric designed for runners that extends across nine styles. McDonald said, “Based upon collaborative work with our ambassadors and athletes, we determine the sensation runners are looking for unrestricted lightweight support, while also delivering the technical performance and endurance they expect from Lululemon.”
In coming weeks, Lululemon will launch a Hike range as the the activity of hiking has increased in popularity over the pandemic. Lululemon is also introducing Throwbacks, which will feature re-releases of past collections, including updated versions of its Astro Pant, Shape Jacket and Inspire Crop.
Finally, in footwear, its second style, the Restfeel slide, was introduced this week following March’s Blissfeel launch and two more, Chargefeel and Strongfeel, are on track to arrive in the second half. Said McDonald, “This is just the beginning for us within this category, which has considerable opportunity.”
Looking ahead, revenue in the second quarter is projected to be in the range of $1.750 billion to $1.775 billion, representing a three-year compound annual growth rate of approximately 26 percent. Year-over-year, the guidance represents a growth of about 17 percent.
EPS for the second quarter is expected in the range of $1.89 to $1.94 for the quarter and, excluding the gain on the sale of an administrative office building, adjusted EPS is expected to be in the range of $1.82 to $1.87. In the 2021 second quarter, adjusted EPS was $1.65.
For 2022, the company now expects net revenue to be in the range of $7.610 billion to $7.710 billion, representing a three-year compound annual growth rate of 24 percent to 25 percent. Year over year, the sales gains range from 21 to 22 percent against $6.3 million in 2021. Previously, Lululemon’s guidance called for sales for the year in the range of $7.49 billion to $7.615 billion.
EPS for 2022 is now expected in the range of $9.42 to $9.57 for the year and $9.35 to $9.50 on an adjusted basis. Previously, EPS was expected to be in the range of $9.15 to $9.35.
Photo courtesy Lululemon