Lululemon Athletica Inc. reported third-quarter results well above Wall Street’s expectations due to improved store productivity, nearly double-digit online growth and greater acceptance of Lululemon’s broader offerings. Total comps jumped 19 percent with increases of 22 percent in women’s and 14 percent in men’s.

“These results demonstrate that our brand is becoming stronger,” said Calvin McDonald, CEO, on a conference call with analysts.

He said the quarter marked Lululemon’s strongest quarterly market share gain in recent history with NPD point-of-sale data showing the retailer’s market share of the U.S. adult active apparel market expanding by 1.4 points over last year.

Pandemic Boost To Active Lifestyle Space
McDonald said the pandemic has heightened people’s interest in “living a more active healthy life and looking for more versatility in their apparel clothing” and that “bodes well” for further growth in the overall active lifestyle space.

But he also singled out a number of drivers for Lululemon’s better-than-expected quarterly performance. These include more women “shopping our entire collection, extending beyond bottoms as we continue to innovate our offering across categories.” He highlighted the success of its bra range and On The Move Pants collection.

Sales are also benefiting as Lululemon continues to deliver a steady pipeline of new products and as inventory flows have been managed “extremely well” through COVID-19-related store closures to avoid understocks, he said. At the store level, providing pay protection to store employees is believed to have aided store re-openings while in-store enhancements, including virtual waitlists, appointment shopping and mobile POS, have supported social-distancing shopping measures.

Finally, McDonald highlighted the payback of investments in e-commerce capabilities over the last several years and accelerated omnichannel roll-outs this year. The CEO said, “These drivers will continue to carry us forward into 2021 and beyond as we work to fuel our momentum.”

Same-Store Sales Climb 19 Percent
In the quarter ended November 1, net revenue increased 22 percent to $1.1 billion, above expectations for a mid to high-single-digit increase. Wall Street’s consensus estimate had been $1.02 billion. On a constant dollar basis, net revenue increased 21 percent.

Adjusted to exclude the impact of the acquisition of the Mirror at-home fitness platform, earnings rose 20.1 percent to $151.3 million, or $1.16, well above Wall Street’s consensus estimate had been 88 cents. Reported earnings rose 14.0 percent to $143.6 million, or $1.10 compared to $126.0 million, or 96 cents, in the third quarter of fiscal 2019.

Total comps rose 19 percent or 18 percent on a constant dollar basis.

DTC or online revenue catapulted 94 percent. On a constant-dollar basis, online sales grew 93 percent on top of a 30 percent increase last year. DTC accounted for 42.8 percent of total revenue compared to 26.9 percent for the year-ago quarter. Online benefited from notable strength in traffic and conversion.

In its store channel, 97 percent of stores were open and productivity increased to 82 percent of last year’s volume on a constant dollar basis, better than Lululemon’s expectation of 75 percent. Overall, store comps were down 17 percent, or 18 percent on a constant dollar basis.

Among product categories, women’s sales grew 22 percent with strength in both tops and bottoms. The gains marked a return to pre-COVID-19 growth rates.

“We continue to leverage our Science of Feel platform to bring new technical merchandise to our guests,” said McDonald. “Since the early days of the pandemic, our guests have been demanding technical product that offers comfort and versatility as they spend more time working and sweating from home.”

Men’s total revenue grew 14 percent, representing a further improvement from the trends in the first and second quarters. Said McDonald, “I’m excited that we’re seeing strength in the bottoms category with our male guests returning to our fixed waistband styles including ABC and Commission while our joggers also continue to perform well.”

Accessories saw a “strong performance” with the help of expanded equipment offerings. As an example, a 3D yoga mat will be launched in the coming months. In the Q&A session, McDonald also said footwear is expected to be launched in the back half of 2021.

Looking at the holidays and beyond, McDonald promised a strong pipeline of innovation. He said, “For the holidays we are offering special edition products in many of our key franchises, and over the course of 2021 you will see us scaling the Science of Feel to bring more technical innovations across our major categories. As I’ve said before, we are in the early stages of growth within our product innovation pillar, and we have ample ways to expand our key categories of run, train, yoga, and On The Move.”

International Sales Boosted By China
By region, revenue grew 19 percent in North America and climbed 45 percent internationally. The APAC region was strong across all major markets although China stood out with revenues expanding more than 100 percent with strength both in-store and online. Said McDonald, “Over the last two years we have tripled the number of stores we operate in Mainland China, and I’m thrilled with how our brand is resonating across both Tier 1 and Tier 2 cities.” In Europe, store traffic continued to see declines but online comps were up nearly 160 percent.

Gross margins increased 100 basis points to 56.1 percent. The improvement was driven by 170 basis points of leverage on occupancy and depreciation and 10 basis points of favorability in foreign exchange. This was partially offset by 80 basis points of deleveraging on product margin primarily due to higher air freight costs related to COVID-19 and higher markdowns.

SG&A expense grew to 36.8 percent as a percent of sales from 35.9 percent.

Income from operations increased 17 percent to $204.9 million. Adjusted to exclude the impact of the acquisition of the Mirror at-home fitness platform, operating income from operations advanced 21 percent to $213.5 million.

Providing an update on the Mirror acquisition, McDonald said Lululemon still expects Mirror to generate in excess of $150 million in revenue in 2020. During the third quarter, a dedicated Mirror tab was added to Lululemon’s U.S. e-commerce site and Mirror shop-in-shops opened in 18 U.S. locations to test its in-store selling experience. Said McDonald, “One of our store managers in Santa Monica described it best, our guests are blown away by the sleek design and functionality of Mirror that is as innovative and unique as our own products. We are just at the beginning of our journey with Mirror, and we are thrilled with the current momentum and excited with what this can mean for next year and beyond.”

Inventory at the quarter’s end was up 23 percent. Inventories are still expected to end the year ahead in the 20 percent to 30 percent range.

Fourth-Quarter Revenues Expected To Expand Mid-To-High Teens
In the fourth quarter, sales are expected to increase in the mid-to-high teens, above the prior expectation of a high-single to low double-digit increase. The growth assumes e-commerce growth remains strong but likely moderates modestly from Q3 levels.

The guidance also assumes the majority of stores remain open through the fourth quarter. Currently, approximately 97 percent of Lululemon’s stores are open globally, in line with Q3; however, the resurgence of COVID-19 in several markets has led to an increased number of mandated capacity restrictions in November and December versus prior months.

“Given our historically high levels of productivity, particularly during the holiday season, these constraints clearly limit the number of guests who can enter our stores at any given time,” said Meghan Frank, CFO. “Therefore, when looking at Q4 overall we are expecting productivity to be approximately 70 percent of last year’s levels with trends in line with Q3 during non-peak weeks.”

Lululemon remains on track to open 30 to 35 net new stores this year with 24 net new stores opened through the end of Q3, contributing to a low-double-digit increase in square footage for the year. Nearly 70 seasonal stores, or temporary stores to support holiday selling, were operating in Q3 and approximately 100 are expected to be open in Q4.

Photos courtesy Lululemon