Lululemon Athletica, Inc. lifted its overall full-year outlook after earnings and sales in the third quarter ended October 29 topped guidance for the third straight quarter but also forecast fourth-quarter guidance that came in lighter than expected in an apparent sign to investors of a potential sales slowdown.
Shares were trading down about 3 percent in pre-market trading Friday on the concerns and despite Lululemon’s board’s approval of a new $1 billion stock buyback plan.
On a call with analysts, Calvin McDonald, CEO, said the retailer was “very pleased” with results over the Thanksgiving shopping weekend, noting that Black Friday marked the single biggest day in company history, with strength across store and e-commerce channels.
“Along with several members of the leadership team, I visited stores in Houston, Dallas and Los Angeles, and we were thrilled to join our local teams and experience their energy and excitement firsthand,” he said. “Our stores were very busy, and our overall performance was driven by strength across both full-price and markdown merchandise.”
However, Meghan Frank, CFO, added that with nearly two-thirds of the fourth quarter left to go, “we remain prudent in our planning.”
She later added, “We remain aware of the uncertainties in the macro environment, and we continue to plan the business for multiple scenarios.”
The cautious guidance comes as Lululemon’s shares took a hit in January 2023 after the retailer lowered its guidance for gross margins for the 2022 fourth quarter on markdown pressures.
McDonald also traced recent softness in men’s sales in North America to macro-economic concerns. He said, “Similar to during the COVID-19 period, we see that when there is some uncertainty in the macro environment, men can become a bit more conservative in their apparel purchases.”
The CEO further noted that Lululemon did not use “sales language” to drive healthy Thanksgiving weekend results and “continue to sell and see very good regular price sales.” The gains over the weekend were boosted by the extension of an additional benefit to Essentials loyalty members who received early access to Black Friday styles via its shop app. He added, “This strategy drove a significant spike in app downloads, with virtually no incremental marketing costs.”
However, McDonald said he “saw a lot of discounting early. I saw deeper discounts” from competitors in the marketplace, especially some newer ones. McDonald said, “I definitely saw a more dynamic promotional-driven environment by some of our peers, by some of the new entries into this category.”
The yoga-themed retailer also absorbed $72.1 million in charges in the latest quarter related to the discontinuance of its Mirror platform as part of a partnership through which Peloton will provide digital content to support its Lululemon Studio business.
Third-Quarter Comps Gain 13 Percent
In the quarter, revenue jumped 19 percent to $2.2 billion, topping company guidance in the range of $2.17 billion to $2.19 billion.
Total comparable sales increased 13 percent, or 14 percent on a currency-neutral basis. Comparable store sales increased 9 percent while DTC revenue advanced increased 18 percent, or 19 percent on a constant dollar basis. DTC revenue represented 41 percent of total revenue compared to 41 percent for the third quarter of 2022.
Traffic was up nearly 25 percent at stores and grew 20 percent online. Frank said, “This speaks to the strength of our omni-operating model as we engage with our guests in ways most convenient to them.”
North America Sales Gain 12 Percent
“We remain pleased with our business in North America, which is in line with our Power of Three x2 targets despite the dynamic operating environment,” said McDonald. “The quarter began strong as guests responded well to our back-to-school product innovations and our strategies to connect with younger guests through dedicated digital marketing and targeted activations, and our market share gains continued.”
McDonald noted that in the third quarter, Circana found overall adult active apparel revenues decreased in the U.S., but Lululemon gained 1.5 points of market share with gains in both men’s and women’s.
“North America remains a significant and compelling opportunity for Lululemon,” said McDonald. “With unaided awareness of only 25 percent, we have several ways to bring new guests into the brand, including ongoing innovation within our product assortment, new store openings and optimizations, and our unique approach toward connection, encompassing both local activation and larger-scale marketing campaigns.”
China Drives Strong International Growth
International sales catapulted 49 percent. McDonald said all international regions grew “strong double digits,” including a 53 percent increase in Greater China.
“While we are keeping a close eye on the macro environment in China, our business remains strong,” said McDonald. “We believe several factors benefit us in this important market, including our relatively small size, with room to grow beyond our 114 stores in mainland China at the end of the quarter; the localized nature of our brand as we leverage our relationships with local fitness studios, instructors, and influencers; and our local- and community-based events. We are excited with the brand acceptance we’re seeing globally as we continue to execute against our plan to quadruple our international business from 2021 levels by the end of 2026.”
By category, women’s revenue increased 19 percent versus last year, men’s increased 15 percent, and accessories grew 29 percent.
McDonald said the women’s gain was fueled by new product launches, strength in bottoms, and ongoing performance in key franchises. A new franchise, Wundermost, described by McDonald as “our softest fabric ever,” saw a ”great initial response” from consumers. Other product highlights on the women’s side include bottoms and second layers.
McDonald said, “Within bottoms, both tights and away-from-body styles performed well, including Align, Wunder Train, and the Dance Studio jogger. In addition, we continue to see success in our key second-layer franchises, including Define, Scuba, and Softstreme. Looking at Quarter 4, you will see fresh seasonal takes on several of our guest favorite franchises, including Scuba, Align, and Wunder Train.”
McDonald said while men’s saw some softness in North America due to macroeconomic pressures, market share gains continued. Men’s growth in international regions “remains very strong,” he added
The response to two new men’s franchises, Steady State and Soft Jersey, “has been very strong, and we are chasing into additional inventory.” Following the holidays, a Pace Breaker and License to Train franchises will be introduced as part of a back-to-gym focus. Men’s footwear will also launch in the first quarter.
McDonald said men’s brand awareness “remains low,” at approximately 13 percent in the U.S., 12 percent in Australia, and single digits everywhere else outside of North America. He said, “Building awareness and consideration remains top of mind for us, and we see ample opportunity to increase the media and brand-building commitment to the men’s business.”
The accessories gain was boosted by bag assortments with the Everywhere Belt Bag posting “solid growth on top of last year’s standout performance.”
Adjusted Gross Margins Climb 220 Basis Points
Gross margin increased 110 basis points in the quarter to 57.0 percent. On an adjusted basis excluding the Mirror charges, the adjusted gross margin jumped 220 basis points to 58.1 percent. The 220-basis-points improvement reflected a 250-basis-point hike in overall product margin, driven primarily by lower freight costs, as well as lower airfreight usage.
SG&A expenses increased to 38.2 percent of revenue from 36.8 percent due to ongoing investments to build brand awareness, among additional investments accelerated to fuel its Power of Three x2 plan that calls for a doubling of the business from 2021 net revenue of $6.25 billion to $12.5 billion by 2026. Growth targets include doubling men’s, doubling direct-to-consumer, and quadrupling international revenue relative to 2021.
Income from operations decreased 4 percent to $338.1 million. Adjusted operating income, excluding the charge, increased 24 percent to $436.3 million. Adjusted operating margin increased 80 basis points to 19.8 percent.
Earnings slid 2.6 percent to $248.7 million, or $1.96, from $255.5 million, or $2.00, a year ago. On an adjusted basis excluding the Mirror charge, earnings were $320.8 million, or $2.53, climbing 25.6 percent a year ago and well above guidance in the range of $2.23 to $2.28.
Inventories at the end of the third quarter of 2023 decreased 4 percent, lower than guidance due predominantly to higher revenue, the provision taken against its remaining Lululemon Studio hardware inventory, the timing of certain receipts, and foreign exchange. On a unit basis, inventory increased approximately 5 percent. Frank said, “We remain comfortable with both the quality and quantity of our inventory. At the end of Q4, we expect inventory on a dollar basis to be flat to down slightly versus last year, with units flat to up slightly.”
For the fourth quarter, revenue is expected between $3.14 billion and $3.17 billion, up 12.7 percent above year-ago levels but below analysts’ average estimate of $3.18 billion. Fourth-quarter profit was forecast between $4.85 and $4.93 per share, up 11.3 percent against year-ago levels but just below analysts’ expectations of $4.94.
For the full year, revenue is now expected in the range of $9.549 billion to $9.584 billion, representing growth of 18 percent and ahead of prior guidance in the range of $9.51 billion to $9.57 billion. EPS on an adjusted basis is projected in the range of $12.34 to $12.42, up from previous guidance in the range of $12.02 to $12.17.
Photo courtesy Lululemon