Lululemon’s Q4 Profits Drop On Mirror Impairment Charge

Lululemon Athletica, Inc. reported a sharp decline in earnings for the fourth quarter due to an impairment charge of $442.7 million related to its Mirror connected-fitness business. Earnings on an adjusted basis grew 31 percent as comparable-store sales jumped 27 percent, topping analyst targets.

Earnings on an adjusted basis came to  $4.40 compared to Wall Street’s consensus estimate of $4.26. Revenue for the quarter came in at $2.8 billion versus the consensus estimate of $2.7 billion. Lululemon had pre-announced earnings in early January.

Calvin McDonald, chief executive officer, stated: “In the fourth quarter and full year 2022, we delivered strong results across the business driven by our innovative products, powerful guest experiences, and strategic market expansion. Our continued high level of performance is a reflection of the hard work and agility of our incredible teams and the deep connections they create with our guests and communities around the world. As we enter 2023, we look forward to another year of strong momentum across the globe and delivering on our Power of Three ×2 growth plan.”

The adjusted non-GAAP financial measures exclude impairment and other charges related to Mirror, acquisition-related costs, the gain on the sale of an administrative office building, and the related tax effects.

For the fourth quarter of 2022, compared to the fourth quarter of 2021:

• Net revenue increased 30 percent to $2.8 billion or increased 33 percent on a constant dollar basis.
  • Net revenue increased 29 percent in North America and increased 35 percent internationally.
• Total comparable sales increased 27 percent, or 30 percent on a constant dollar basis.
  • Comparable store sales increased 15 percent, or 17 percent on a constant dollar basis.
  • DTC net revenue increased 37 percent, or 39 percent on a constant dollar basis.
• DTC net revenue represented 52 percent of total net revenue compared to 49 percent for the fourth quarter of 2021.
• Gross margin decreased 300 basis points to 55.1 percent. Adjusted gross margin decreased 70 basis points to 57.4 percent.
• Income from operations decreased 47 percent to $314.4 million. Adjusted income from operations increased 33 percent to $785.3 million.
• Operating margin decreased to 11.3 percent from 27.7 percent in the fourth quarter of 2021. Adjusted operating margin increased 50 basis points to 28.3 percent.
• The effective income tax rate for the fourth quarter of 2022 was 62.3 percent compared to 26.4 percent for the fourth quarter of 2021. The adjusted effective tax rate was 28.7 percent for the fourth quarter of 2022 compared to 26.4 percent for the fourth quarter of 2021.
• The company recognized post-tax impairment and other charges related to Mirror totaling $442.7 million during the fourth quarter.
• Diluted earnings per share were $0.94 compared to $3.36 in the fourth quarter of 2021. Adjusted diluted earnings per share for the fourth quarter of 2022 were $4.40 compared to $3.37 in the fourth quarter of 2021.
• The company repurchased 0.2 million shares of its own common stock at an average price of $323.14 per share for a cost of $68.7 million.
• The company opened 32 net new company-operated stores during the quarter, ending with 655 stores.

For 2022 compared to 2021:

• Net revenue increased 30 percent to $8.1 billion or increased 32 percent on a constant dollar basis.
  • Company-operated store net revenue increased 29 percent.
  • Net revenue increased 29 percent in North America and increased 35 percent internationally.
• Total comparable sales increased 25 percent, or 28 percent on a constant dollar basis.
  • Comparable store sales increased 16 percent, or 19 percent on a constant dollar basis.
  • DTC net revenue increased 33 percent, or 35 percent on a constant dollar basis.
• DTC net revenue represented 46 percent of total net revenue compared to 44 percent for 2021.
• Gross margin decreased 230 basis points to 55.4 percent. Adjusted gross margin decreased 150 basis points to 56.2 percent.
• Income from operations was consistent at $1.3 billion. Adjusted income from operations increased 30 percent to $1.8 billion.
• Operating margin decreased to 16.4 percent from 21.3 percent in 2021. Adjusted operating margin increased 10 basis points to 22.1 percent.
• The effective income tax rate was 35.9 percent for 2022 compared to 26.9 percent for 2021. The adjusted effective tax rate was 28.1 percent for 2022 compared to 26.2 percent for 2021.
• Diluted earnings per share were $6.68 compared to $7.49 in 2021. Adjusted diluted earnings per share were $10.07 in 2022 compared to $7.79 in 2021.
• The company repurchased 1.4 million shares of its own common stock at an average price of $317.89 per share for a cost of $443.6 million.
• The company opened 81 net new company-operated stores during the year, ending with 655 stores.

Meghan Frank, CFO, stated: “We are pleased with our performance in the fourth quarter, which remained balanced across product category, channel and regions. Our ability to exceed our annual revenue target in a dynamic operating environment is a testament to the enduring strength of the Lululemon brand. Looking ahead, we remain optimistic regarding our ability to deliver sustained growth and long-term value for all our stakeholders.”

Balance Sheet Highlights
The company ended 2022 with $1.2 billion in cash and cash equivalents compared to $1.3 billion at the end of 2021. It had $393.5 million of capacity under its committed revolving credit facility at the end of 2022.

Inventories at the end of 2022 increased by 50 percent to $1.4 billion compared to $966.5 million at the end of 2021. This is inclusive of a $62.9 million provision against inventory related to Lululemon Studio, which reduced the inventory growth rate by seven percentage points.

Membership And Lululemon Studio (Formerly Mirror)
Building on the two-tier membership program launched in October 2022, the company will be expanding the Lululemon Studio premium tier by enabling guests to access its digital fitness content via a new app, launching in summer 2023, for a lower monthly fee.

The company is evolving its Studio strategy and will focus on digital app-based services. It will continue to provide in-home hardware and content for members who own or would like to purchase a Lululemon Studio Mirror and currently there are no changes planned for the free, Essentials tier of the membership program which continues to experience robust growth in new members.

The company believes this strategy will create efficiencies and enable more guests to experience the full range of digital fitness content, while also building a larger community of guests with a deeper connection to Lululemon.

Fiscal 2023 Outlook
For the first quarter of fiscal 2023, we expect net revenue to be in the range of $1.890 billion to $1.930 billion, representing growth of approximately 18 percent. Diluted earnings per share are expected to be in the range of $1.93 to $2.00 for the quarter. This guidance assumes a 30 percent tax rate.

For fiscal 2023, we expect net revenue to be in the range of $9.300 billion to $9.410 billion, representing growth of approximately 15 percent. Diluted earnings per share are expected to be in the range of $11.50 to $11.72 for the year. This guidance assumes a 30 percent tax rate.

The guidance does not reflect potential future repurchases of the company’s shares.

Power of Three x2
The company’s Power of Three x2 growth plan calls for a doubling of the business from 2021 net revenue of $6.25 billion to $12.5 billion by 2026. The key pillars of the plan are product innovation, guest experience, and market expansion and the growth strategy includes a plan to double men’s, double direct to consumer, and quadruple international net revenue relative to 2021.

Photo courtesy Lululemon