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Lululemon’s Sustainability Strategies Take Shape in $1.2B Quarter

Lululemon Athletica continues to ride the athleticwear and athleisure trend the Covid-19 pandemic accelerated into high gear, taking in net revenue of $1.2 billion, an increase of 88 percent year over year and 57 percent on a two-year basis. As a result, the company raised its sales and earnings outlook for both the upcoming second quarter and the full 2021 year.

In a Nutshell: In May, Lululemon launched two major sustainability initiatives as part of the 12-goal Impact Agenda set out during October 2020.

The athleticwear brand launched a pilot trade-in program, Like New, in California and Texas, in partnership with Trove. Like New enables shoppers to trade in gently used Lululemon clothing in one of more than 80 participating stores or by mail in exchange for an online gift card. All of the profits are reinvested in the company’s sustainability initiatives.

Lululemon also launched Earth Dye, a new, limited-edition collection of products that features casual, easy-to-wear styles made with lower-impact dyes upcycled from the waste of oranges, beets and saw palmetto trees. The company says these dyes use less water, carbon and synthetic chemicals compared to conventional synthetic dyes, which aligns with its goal to make 100 percent of products with sustainable materials and end-of-use solutions.

In the company’s earnings call, CEO Calvin McDonald highlighted the strength of both women’s and men’s product assortments, with women’s revenue increasing 23 percent and men’s growing 27 percent on a two-year compound annual growth rate (CAGR) basis.

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“We saw strength in women’s across the assortment, as guests are responding well to both tops and bottoms. Our performance in tops was driven by core styles and franchise extensions such as the Align tank,” McDonald said in the call. “Our male guests returned to our stores as we emerged from the pandemic. Men’s growth outpaced women’s growth on both at one- and two-year basis, and we are seeing very positive momentum in our On the Move assortment.”

Inventories at the end of the first quarter of 2021 increased 17 percent to $732.9 million, compared to $625.8 million to close the year-ago period. At the end of the second quarter, the retailer expects levels to increase approximately 25 percent to 30 percent year over year.

The Canadian company’s capital expenditures were $64.2 million in the quarter, compared to $52.1 million in the first quarter of 2020. The increase was primarily the result of increased e-commerce channel capital expenditures driven by investment in distribution centers. Lululemon now has 521 company-operated stores, opening three in the quarter and closing one.

Gross profit was $700.3 million, with gross margin comprising 57.1 percent of net revenue, a 580-basis-point (5.8-percentage-point) boost from the prior year quarter’s $334.4 million gross profit, or 51.3 percent gross margin.

The gross margin bump was primarily the result of three factors: a 540-basis-point (5.4-percentage-point) dip in depreciation and occupancy costs as a percentage of net revenue; a decrease in costs related to product departments and distribution centers as a percentage of net revenue (100 basis points, or one percentage point); and a favorable impact of foreign exchange rates of 50 basis points (0.5 percentage points).

Partially offsetting the margin increase was a dip in product margin of 110 basis points (1.1 percentage points), primarily due to higher air freight costs as a result of Covid-19 impacts on logistics availability and costs, partially offset by lower markdowns and inventory provision expenses.

On a two-year basis, gross margin jumped 320 basis points (3.2 percentage points).

The company ended the first quarter of 2021 with $1.2 billion in cash and cash equivalents, and the capacity under its committed revolving credit facilities was $397.3 million.

Lululemon increased its outlook for the second quarter and the full year. Second-quarter net revenue is now expected to be between $1.3 billion and $1.33 billion, instead of the prior range of $1.1 billion to $1.13 billion.

Diluted earnings per share are expected to be in the range of $1.05 to $1.10 for the quarter and adjusted diluted earnings per share are expected to be in the range of $1.10 to $1.15, well ahead of the previous guidance, which was 81 cents to 85 cents per share alongside an adjusted 86 cents to 90 cents per share.

For 2021, Lululemon expects net revenue to be in the range of $5.825 billion to $5.905 billion, up from estimates of $5.55 billion to $5.65 billion.

And full-year diluted earnings per share are anticipated to improve even more than expected with a range of $6.52 to $6.65, well ahead of the formerly projected $6.10 to $6.25 range. Adjusted diluted earnings per share are expected to be in the range of $6.73 to $6.86, up from prior the outlook of $6.30 to $6.45.

Net Sales: Net revenue increased 88 percent year over year to $1.2 billion. On a constant dollar basis, net revenue increased 83 percent. Compared to the first quarter of 2019, net revenue increased by $444.2 million, or 57 percent, representing a two-year CAGR of 25 percent.

On a year-over-year basis, company-operated stores‘ net revenue increased 106 percent to $536.6 million, or 43.8 percent of total revenue,

Direct-to-consumer net revenue, which accounts for Lululemon’s online sales, increased 55 percent to $545.1 million, and jumped 50 percent on a constant dollar basis. DTC net revenue represented 44.4 percent of total net revenue compared to 54 percent for the first quarter of 2020.

Other revenue, which includes net revenue from outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, and the sales of in-home fitness equipment and associated content subscriptions, totaled $144.8 million, or 11.8 percent of total net revenue.

From a market perspective, North America saw net revenue increase 82 percent, while international sales jumped 125 percent.

Net Earnings: Lululemon took in net income of nearly $145 million in the first quarter, ahead of the $28.6 million generated in last year’s quarter, and also an improvement over 2019’s $96.6 million first-quarter net income totals.

Diluted earnings per share were $1.11 compared to 22 cents in the first quarter of 2020. Adjusted diluted earnings per share were $1.16 compared to 23 cents during the period.

Income from operations was $193.8 million, including tax impacts related to the Mirror acquisition, while adjusted income from operations was $201.5 million.

CEO’s Take: McDonald reiterated that the long-term outlook for Lululemon sales is a 50-50 split between North America and international, with the commitment to quadruple the foreign business.

“I don’t see anything that’s going to prevent us from achieving those results,” McDonald said. “We’re seeing good growth in every market. In EMEA, we continue to see growth, even with the pressure on stores because our dot-com business continues to drive growth. In every market, whether in Australia/New Zealand or rest of APAC, there’s very solid momentum. China is one of our biggest potentials and there’s continuous momentum there. We were up 200 percent in the quarter, with strong growth in store and strong growth in dot-com, and we’re excited about that.”