Defying the turmoil others are seeing across the active lifestyle space, Lululemon Athletica reported second quarter results that topped guidance and raised its outlook for the year.
Highlights included its booming business in Asia and acceleration of online revenues, but strength was largely across the board. The momentum, according to Laurent Potdevin, CEO, included strong double-digit sell-throughs in women’s and men’s pants and “very healthy high single digit, low double digit trends” across men’s and women’s tops in Q2 and so far early in Q3. Lululemon also plans to introduce its first men’s focused marketing campaign.
The CEO further pointed to strong responses to the launch of the Enlite bra, its “This is Yoga” global campaign, and numerous local activation efforts.
“Our strong Q2 results reflects solid delivery against our key growth initiatives,” said Potdevin on a conference call with analysts. “The strategic pillars, including digital, international, men’s and North America drove the improvement in our business as we progressed towards realizing our 2020 vision top achieve $4 billion in revenue.”
In the quarter ended July 30, earnings declined 9.2 percent to $48.7 million, or 36 a share, due to a charge to close most of its Ivivva locations and planned digital investment spending. Excluding the impact of the Ivivva restructuring that was announced on June 1, EPS was 39 cents. Results came in above the company’s guidance between 33 and 35 cents and Wall Street’s average target of 35 cents.
Revenue climbed 12.9 percent to $581.1 million, exceeding guidance calling for sales between $565 million and $570 million. On a constant dollar basis, revenue increased 13 percent.
Its physical locations saw only modest growth, with comps up 2 percent on both a reported and constant dollar basis. But that marked some pickup from the first quarter, when comps had slid 1 percent on both a reported and constant dollar basis.
Stuart Haselden, COO and CFO, said “a nice improvement in traffic is now extending into the early part of Q3.” He added, “We also saw positive trends in conversion, AUR and UPT which gives us confidence in our store comp trends as we are not depending on any single factor.”
Direct to consumer revenue jumped 29 percent, or increased 30 percent on a constant dollar basis, benefiting in part by the holding of an online warehouse sale. Excluding the impact of the sale, direct to consumer revenue climbed 15 percent, or increased 16 percent on a constant dollar basis.
Haselden said despite the lift from the warehouse sale, online’s “underlying KPIs are healthy as we have seen increases in both traffic and conversion as guests are responding nicely to the enhancements we are making to the site.”
Potdevin added that website conversion increased by 30 percent versus the first quarter and reflects the payback from investments.
“We continue to make steady strides towards delivering a digital ecosystem that is seamless expansion of our store experiences founded on human connection and deep product knowledge,” said Potdevin. “Through improved credit photography and video that overtly highlights the innovative performance and functional detailing that defines our products, improved merchandise assortments and technical site enhancements, we are creating a consistently rich and compelling experience for guests. We are early in this journey and I am so excited about the tremendous effect our focus has had on the performance so far.”
Among product categories, men’s continued “to deliver significant outperformance in the core category of men’s pants and shorts seeing 23 percent growth in Q2, driven by the strength of our ABC franchise,” said Potdevin.
Tops in men’s also “performed well” with ongoing demand for its multiple metal vent styles including Surge, which was updated with a new lightweight version, Henley and 1/2 Zip. Said Potdevin. “Looking to Q3, I am stoked about the first focus, men’s brand campaign launching mid-September expressing our unique perspective as an extension of This is Yoga.”
In women’s, bottoms “performed strongly,” led by the brand’s Naked Sensation styles, Align and Fast & Free.
“Women’s tops, both short sleeves and long sleeve, drove a really strong inflection in our comp as our guests responded positively to burnouts, engineered mesh and our supernatural fabrics, delivering the soft natural feel guest love with high performance attributes,” said Potdevin. “As we enter the second half of the year, I am excited to see the momentum continuing in Q3 across jackets and outerwear, specifically within the core Scuba Hoodie. and Packables.”
Lululemon also launched its first fully integrated product campaign online and in-store featuring the Enlite bra and the bras became a top performer. An exclusive capsule collection with fitness guru Taryn Toomey was launched and saw the majority of its online products sell out on its first day. Potdevin also mentioned Lululemon’s new pilot to bring footwear from APL to select stores to mark its first “head to toe guest offering.”
Looking to Q3, Lululemon will launch of its newest fabric innovation, Everlux, designed for high intensity workouts.
Internationally, Asia saw 70 percent year-over-year market growth, led by over 350 percent in China. Lululemon’s business on Tmall, the biggest e-commerce platform in China, jumped 175 percent, fueled by a more than doubling its traffic coupled with higher conversion. In May, Lululemon’s second Unroll China featuring live streaming yoga classes was held across six cities with over 10,000 attendees including 5,000 in Beijing. Twelve stores are expected to open in Asia this year with six stores planned in the second half in China in Beijing, Guangzhou, Chengdu and Shenzhen. The first LULU store in Japan will open later this year in Shinjuku.
Europe is “still nascent” with new studios opening and increasing community engagements but saw market growth of 50 percent year over year. Two new stores will open in the second half, including its first in Munich. In London, where it has its strongest presence, the brand’s second annual Sweatlife festival featuring London’s top studios attracted 2,500 guests.
“Having personally done back-to-back spinning and boxing, it’s safe to say that London was a hit,” said Potdevin. “Sweatlife is a very effective way to connect with and build our collective and similar activation will be rolled out in the future.”
In North America, destination locations were opened in New York and Vancouver. Its first-ever meditation lounge, Mindfulosophy, opened on 5th avenue in Manhattan. Said Potdevin, “We are thrilled with the performance so far. It’ accretive to our New York store fleet and allows guest from around the world to experience the brand.”
In Vancouver, its first store ever reopened in Kitsilano with enhanced digital merchandising. Lululemon was also lead sponsor of the Toronto Waterfront 10K. In the Hamptons, Lululemon has been collaborating with SoulCycle at the Barn studio in Bridgehampton. In mid-August, the sixth annual SeaWheeze running Festival in Vancouver attracted 10,000 runners from over 18 countries.
Gross margin was 51.2 percent, an increase of 180 basis points year over year. Excluding the impact of the Ivivva restructuring, adjusted gross margin was 51.6 percent, an increase of 220 basis points, well above expectations.
The margin improvement was primarily driven by a 260 basis point increase in overall product margin resulting from favorability in product mix and lower product cost, partly offset with higher markdowns due to the online warehouse sale. Offsetting these factors were 20 basis points related to foreign exchange and 20 basis points of deleverage in occupancy, depreciation and product and supply chain costs.
SG&A expenses grew to 38.8 percent of revenue compared to 35 percent, in line with expectations. Approximately one-third of the increase related to the planned costs associated with the improvements to its e-commerce platform while another third related to the launch of its first global brand campaign, This is Yoga. The remainder represented foreign exchange headwinds.
Income from operations was $68.7 million, a decrease of 7.1 percent. Excluding the pretax charges of $5.4 million related to the planned closures of the Ivivva stores, adjusted income from operations increased by $0.2 million to $74.1 million.
Looking ahead, Lululemon now expects sales for the year in the range of $2.55 billion to $2.6 billion based on a total comparable sales increase in the low-single digits on a constant dollar basis. That’s slightly ahead of its previous guidance that called for sales between $2.53 billion to $2.58 billion on the same comp increase in the low-single digits on a constant dollar basis.
Given the above-plan second quarter, EPS guidance for the year was raised to a range of $2.04 to $2.11 on a net basis and $2.35 to $2.42 excluding charges. Previously, guidance had called for net earnings ranging from $1.97 to $2.07 and adjusted earnings between $2.28 to $2.38.
For the third quarter, revenues are projected to be in the range of $605 million to $615 million based on a total comparable sales increase in the mid-single digits on a constant dollar basis. Reported EPS is expected in the range of 33 to 35 cents for the quarter and adjusted EPS between 50 and 52 cents. In the 2016 third quarter, sales were $544.4 million, reported EPS was 50 cents a share, and adjusted EPS was 47 cents.
Photo courtesy Lululemon