Breaking out of the slew of second-quarter sales declines for many retailers and brands, Lululemon Athletica Inc. saw net revenue for the period ended Aug. 2 increase 2 percent year over year to $902.9 million.
However, company-operated stores net revenue fell 51 percent to $287.2 million year over year. Net income fell to 30.6 percent to $86.8 million from $124.99 million in the prior-year quarter.
“The results we are sharing today demonstrate the strength of the Lululemon brand as we face these unexpected times and see the future of retail accelerate through an expansion of e-commerce and digital sweat offerings,” CEO Calvin McDonald said. “Our products built with technical innovation and performance fabrics is ideal for enabling the work from home and versatile lifestyle that has grown exponentially in the Covid-19 world. Building upon these components, our acquisition of at-home fitness innovator Mirror and our continued expansion globally demonstrates our ability to navigate the near-term while planning for the long-term growth.”
DTC Pops
Direct-to-consumer (DTC) net revenue jumped 155 percent to $554.3 million. DTC net revenue represented 61.4 percent of total net revenue compared to 24.6 percent for the second quarter of fiscal 2019.
Gross profit rose 1 percent was $489.5 million, while gross margin was 54.2 percent, a decrease of 80 basis points compared to the year-ago quarter.
Income from operations decreased 26 percent to $124.4 million, as operating margin came in at 13.8 percent, a decrease of 520 basis points compared to the second quarter of fiscal 2019.
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The company ended the second quarter of fiscal 2020 with $523 million in cash and cash equivalents and the capacity under its committed revolving credit facilities was $697.7 million. In the year-ago period, Lululemon had $623.7 million in cash and cash equivalents.
Inventories at the end of the second quarter increased 36 percent to $672.8 million compared to $494.3 million at the end of the prior-year period. The company ended the quarter with 506 stores.
Inflection point
“We’re pleased with our overall business results for the second quarter, as Lululemon increasingly lives into its omni potential,” CEO Calvin McDonald told analysts on a conference call. “As trends around the world are shifting to working and sweating from home with an increased focus on health and wellness, we believe 2020 is likely an inflection point for retail and for lululemon. We are cautiously optimistic with regard to the second half of the year as we continue to navigate the uncertain environment.”
McDonald said as the company continues to operate in the COVID-19 environment, it is seeing a shift in behavior “in terms of working from home, sweating from home and the increased importance of living an active and healthy lifestyle.”
“These trends play to our strengths and set up an opportunity for us to continue to innovate and gain market share,’ the CEO said. “We are learning how our guests are changing their behaviors and we are adapting and engaging with them in new ways. We remain committed to our Power of Three growth plan, including the doubling of men’s, doubling of e-commerce and quadrupling international by 2023.”
McDonald said Lululemon has seen a healthy mix of new and existing customers, and historically retail-only patrons are now shopping with online. In order to support growth in the business, capture a potential further increase in demand in the fourth quarter four and ensure customers continue to receive the highest level of service, the company has accelerated investments this year within its e-commerce channel.
“These investments include developing site enhancements, building our transactional omni functionality and increasing fulfillment capabilities,” he said. “These further enhancements were on our roadmap for the next two years and given our e-commerce business has currently accelerated beyond our expectations, we prioritized and pulled forward these investments.”
International and innovation
The company has also continued to grow across international markets. In China, Lululemon is experiencing a strong rebound in brick and mortar with same-store sales up over 30 percent, coupled with strength in e-commerce, which grew more than 130 percent in the quarter, and in Europe, where a greater than 160 percent lift in e-commerce is driving the business.
“When looking at store growth in our regions in quarter two, we opened nine new locations across Asia and Europe, including our 100th location in APAC, an exciting milestone for our brand in this key growth market,” McDonald said.
As a result of the Covid-19 pandemic, all of the company’s stores in North America, Europe, and certain countries in Asia Pacific were temporarily closed during the first quarter of fiscal 2020. The company began reopening its retail locations in these markets during the second quarter of fiscal 2020. As of Aug. 2, 492 of its 506 company-operated stores were open.
McDonald reported that on average, reopened stores are performing at 75 percent of last year’s volume. He said the company is seeing traffic declines relative to last year and expect these constraints to endure at least through the end of the year.
“We continue to believe physical stores are and always will be an extremely important part of our ecosystem,” he said. “From a sales standpoint, our stores are highly productive, and they enable so much more than simply the purchase of apparel by our guests. Our stores are our local hub and communities across the globe, gathering spots for our ambassadors and our connection to local studios facilitate e-commerce transactions via our ship-from-store and buy online pickup in store capabilities and our portal to bring new guests into our brand, particularly men. This year, we plan to open 30 to 35 net new stores, while also accelerating our seasonal store strategy.”
Shifting now to product innovation, last month, Lululemon expanded its on-the-move collection with the introduction of new pants styles for women and men. For women, the brand launched the City Sleek 5 pocket powered by Warpstreme fabric, and for men, it rolled out the Bowline pant in new utility TAC fabric. Initial response to these new styles has been strong.