Lululemon Athletica, Inc. reported earnings declined slightly due to a charge related to its move to discontinue its Mirror platform as part of a new partnership with Peloton. Excluding the charge, earnings and sales topped guidance for the third straight quarter and Lululemon again lifted its outlook for the year.

Shares are trading down about 4 percent in after-market trading Thursday evening apparently as forecasts for the holiday quarter came in lighter than expected. The retailer also absorbed a post-tax asset impairment and other charges related to Lululemon Studio in the latest quarter totaling $72.1 million.

Lululemon paid $500 million for the Mirror-connected fitness device and platform during the height of the pandemic-induced exercise craze in 2020. In the 2022 fourth quarter, Lululemon took a $442.7 million post-tax impairment charge and by April 2023 indicated it was looking to sell the business.

As part of the Peloton deal announced in late September, Peloton becomes the exclusive digital content provider for Lululemon’s Studio at-home workout offering while Lululemon takes over as the exclusive athletic apparel partner to Peloton.

Lululemon discontinued its app-only membership tier, effective November 1, while offering its app users the option to convert to Peloton’s App One Membership. Lululemon indicated in its third-quarter release that it had ceased selling Mirror hardware after previously saying sales would end at the close of 2023. Lululemon continues to service and support existing subscribers.

Lululemon later confirmed that it laid off approximately 120 Lululemon Studio employees related to the discontinuance of its Mirror device and related content offering.

Expecting a negative investor reaction to the news of another charge, Lululemon said Thursday that its board had authorized a $1 billion stock repurchase program.

Excluding the impact of the Mirror divestiture, Lululemon’s business appears healthy.

Revenues in the quarter of $2.2 billion topped company guidance in the range of $2.17 billion to $2.19 billion. Adjusted EPS was $2.53, well above guidance in the range of $2.23 to $2.28.

Calvin McDonald, chief executive officer, stated: “This was another strong quarter for Lululemon as our innovative product offerings and community activations continued to powerfully resonate with our guests globally. As we enter the holiday season, we are pleased with our early performance and are well-positioned to deliver for our guests in the fourth quarter. I am energized by the significant opportunities ahead, and would like to thank our incredible teams around the world for their continued passion and commitment to our brand.”

The adjusted non-GAAP financial measures below exclude certain inventory provisions, asset impairments, and restructuring costs recognized in relation to Lululemon Studio, and the related income tax effects of these items.

For the third quarter of 2023, compared to the third quarter of 2022:

  • Net revenue increased 19 percent to $2.2 billion.
  • Net revenue increased 12 percent in North America and increased 49 percent internationally.
  • Total comparable sales increased 13 percent, or 14 percent on a constant dollar basis.
  • Comparable store sales increased 9 percent.
  • DTC net revenue increased 18 percent, or 19 percent on a constant dollar basis.
  • DTC net revenue represented 41 percent of total net revenue compared to 41 percent for the third quarter of 2022.
  • Gross profit increased 21 percent to $1.3 billion. Adjusted gross profit increased 23 percent to $1.3 billion.
  • Gross margin increased 110 basis points to 57.0 percent. Adjusted gross margin increased 220 basis points to 58.1 percent.
  • Income from operations decreased 4 percent to $338.1 million. Adjusted income from operations increased 24 percent to $436.3 million.
  • Operating margin decreased 370 basis points to 15.3 percent. Adjusted operating margin increased 80 basis points to 19.8 percent.
  • Income tax expense increased 2 percent to $99.2 million. The effective tax rate for the third quarter of 2023 was 28.5 percent compared to 27.6 percent for the third quarter of 2022. The adjusted effective tax rate was 28.1 percent for the third quarter of 2023.
  • The company has entered into a partnership with Peloton Interactive, Inc. for the provision of digital fitness content and will no longer produce its content for the Lululemon Studio Mirror. While the company will continue to service and support existing subscribers, it has ceased selling the Mirror hardware. The company recognized post-tax asset impairment and other charges related to Lululemon Studio totaling $72.1 million during the third quarter.
  • Diluted earnings per share were $1.96 compared to $2.00 in the third quarter of 2022. Adjusted diluted earnings per share were $2.53 in the third quarter of 2023.
  • The company opened 14 net new company-operated stores during the third quarter, ending with 686 stores.

Meghan Frank, chief financial officer, stated: “Our third quarter performance, which exceeded our expectations on the top- and bottom-line, reflects the ongoing strength of our business model and our teams’ ability to successfully execute at a high level amid an uncertain macro environment. As we look to the end of our fiscal year and into 2024, we remain focused on driving long-term growth and creating value for all our stakeholders.”

Stock Repurchase Program
During the third quarter of 2023, the company repurchased 0.6 million shares of its common stock at an average price of
$380.88 per share for a cost of $210.8 million. As of October 29, 2023, the company had $243.2 million of authorization remaining on its previously authorized stock repurchase program.

On November 29, 2023, the board of directors approved an additional stock repurchase program for up to $1.0 billion of the company’s common shares.

Balance Sheet Highlights
The company ended the third quarter of 2023 with $1.1 billion in cash and cash equivalents and the capacity under its committed revolving credit facility was $393.4 million. Inventories at the end of the third quarter of 2023 decreased 4 percent to $1.664 billion compared to $1.742 billion at the end of the third quarter of 2022.

2023 Outlook
For the fourth quarter of 2023, the company expects net revenue to be in the range of $3.135 billion to $3.170 billion, representing growth of 13 percent to 14 percent. Diluted earnings per share are expected to be in the range of $4.85 to $4.93 for the quarter. This assumes a tax rate of approximately 30 percent.

For 2023, the company expects net revenue to be in the range of $9.549 billion to $9.584 billion, representing growth of 18 percent. Diluted earnings per share are expected to be in the range of $11.77 to $11.85 for the year, and excluding certain inventory provisions, asset impairments, and restructuring costs recognized in relation to Lululemon Studio, and their related tax effects, adjusted diluted earnings per share are expected to be in the range of $12.34 to $12.42. This assumes a tax rate of approximately 29.5 percent.

Under its prior guidance, Lululemon projected sales for the year in the range of $9.51 billion to $9.57 billion and EPS in the range of $12.02 to $12.17.

Photo courtesy Lululemon