By Thomas J. Ryan
On his company’s fourth-quarter conference call, Calvin McDonald, CEO, noted that the “underlying health of our business is strong” as he outlined five levers that will help the chain successfully manage the disruption caused by the COVID-19 pandemic.
The five levers include:
- A strong balance sheet: Lululemon ended the year with $1.1 billion in cash, no long-term debt, and a $400 million untapped revolver.
- Inventory optimization: Investments in key technologies, including RFID, as well as strong partnerships with vendors will help the retailer to maximize inventory across its network while working down overall levels.
- The power of product: McDonald said, “Our assortment is less seasonal in nature as many of our core styles are relevant year-round and can be held for future use.”
- Multi-channel flexibility: Lululemon’s e-commerce sites, mobile apps and Omni capabilities allow customers to “shop in multiple ways, which is complemented by our agile store formats.”
- Active lifestyle strength: McDonald said, “At our core, we solved sweaty problems for athletes, and we do not believe the current situation will change the trend toward people wanting to live an active and healthy lifestyle.”
Said McDonald, “These are some of the reasons we’re confident in our abilities to navigate the near-term while working to realize the opportunities over the longer term.”
In addition, Lululemon has some early learnings from China, which went through a quick two-week closing period before slowly reopening over the last four weeks. All stores have now re-opened in China, except for one in Wuhan that’s set to open next week. Said McDonald about China, “We are not yet back to pre-closing volumes, but the business is getting stronger week by week.”
He said China faces a support phase and a recovery phase in working to normalized operations across regions.
In the support phase, beyond safety protocols for staff and consumers, Lululemon has been offering online sweat sessions for customers with yoga, meditation, pilates, dance, and training classes. In China, thousands of new followers were gained on WeChat. On Instagram, during the first week of the broader store closures across North America and Europe since March 16, nearly 170,000 consumers participated in live classes. Said McDonald, “It’s inspiring to see the strength of our guests come together this way, and we’ll continue to stay closely connected as we navigate what’s ahead.
Numerous ambassadors are helping Lululemon stay engaged with local communities through these virtual sweat sessions. A global Ambassador Relief Fund was recently launched by the company as many ambassadors are small business owners who have been forced to close their doors.
In the recovery phase, one focus will be on ensuring inventory remains in balance amid the “current reduction in demand we’re experiencing” and the chain is assessing assortments with a full-year view. Lululemon said it has flexibility with regard to fall and winter 2020 receipts and can push out or reduce buy orders. Said McDonald, “We’re in constant communication with our vendors, and we have flexibility regarding our receipts for the second half of the year.”
Key e-commerce distribution centers continue to function. Added McDonald, “Over the last several years, we have made significant investments in our supply chain and distribution network. And I’m confident that we’ll be able to further leverage these investments to help us navigate through the current situation.”
Lululemon is also currently evaluating expenses, capital expenditures and store openings and remodeling projects. The retailer will be reducing non-essential operating expenses and reprioritizing capital spend toward business-critical projects. Steps have included curtailed business travel, slowing the pace of new hires, rationalizing its marketing spend, and working with landlords on new store openings and remodeling projects. Said McDonald, “We are acting now to ensure we can reaccelerate our growth drivers when we are ready.”
A focus on bringing product innovation to the marketplace continues. Events such as its 10k run have been suspended through July 31 but efforts to connect with communities online also include the new Community Carries On Hub, which aggregates the best online content from ambassadors.
Lululemon’s coronavirus strategy was provided as the retailer reported a strong fourth quarter with total revenue growth of 20 percent, to $1.4 billion. Wall Street’s consensus estimate had been $1.38 billion.
Constant dollar comp increase of 20 percent is on top of a 17 percent increase last year. “Our quarter four results demonstrate that our guests responded incredibly well to our product this holiday,” said McDonald.
Growth was seen across all categories with comps in women’s up 12 percent, men’s comps up 39 percent and accessory comps up 24 percent. Comps were 9 percent in stores on top of a 7 percent increase in Q4 of last year and 41 percent in digital on top of a 39 percent increase last year. E-commerce accounted for 33 percent of total revenue. Increased traffic in Q4 continued to drive comps, both in-store and online, with increases in the high-single-digits and over 30 percent respectively.
Within regions, North America was up 19 percent, international was up 25 percent, and China was up 70 percent.
Gross margins improved 70 basis points to 58.0 percent. The improvement was driven primarily on an 80 basis point increase in overall product margin resulting from lower product costs and favorability in product mix. In the aggregate, occupancy, depreciation, product and supply chain costs had minimal impact in the quarter.
SG&A expenses were reduced to 28.2 percent of revenue, compared to 28.9 percent a year ago. Operating income improved 25.7 percent to $416.5 million.
Net income for the quarter rose 21.6 percent to $298 million or $2.28 per diluted share, compared to adjusted earnings per diluted share of $1.85 for the fourth quarter of 2018. Wall Street’s consensus estimate had been $2.25. Net earnings in the year-ago period came to $218,465 million, or $1.65, after non-recurring charges.
For the full-year 2019, total revenue growth was 21 percent. Constant dollar comp increased 18 percent on top of the same 18 percent increase in 2018. EPS climbed 28 percent. Square footage was up 18 percent versus last year driven by the addition of 51 net new stores since Q4 of 2018. The company ended the year with 491 stores.
Looking ahead, Patrick Guido, CFO, said that through the second week of March, North American store comps remained strong, in line with Q4 trend and driven by consistent traffic. In addition, the digital business has remained strong throughout, driven by traffic and improving conversion. Said Guido, “The strength of our business early in Q1, both in-store and online, reinforces that our brand remains strong.”
However, a “dramatic slowdown” in business was seen in conjunction with store closures and that’s expected to have a negative impact on Q1 comps, margins and EPS. Due to the impact that COVID-19, Lululemon said it would not be providing guidance for fiscal 2020 at this time.
McDonald concluded, “Although, we do not know exactly when the current situation will pass, what we do know is that our stores will reopen. We know that initially, the business will be lower than it was pre-COVID-19, but we believe that each day and each week it will keep building. We are planning for multiple scenarios, and in any one of these, we know that our brand is strong and has unique pillars of strength that will keep driving our momentum forward.”
Photo courtesy Lululemon x Robert Geller