Second-quarter net revenue at Lululemon increased 29 percent to $1.87 billion, ahead of the $1.77 billion expected by analysts surveyed by Refinitiv. Net income was $289.5 million on adjusted diluted earnings per share of $2.20, well ahead of the projected $1.87 per share.
Shares of the company surged nearly 10 percent following the news.
In a Nutshell: The Vancouver-based athleticwear company continues to expect high growth for the remainder of the year, raising its full-year guidance for the second time this year on the earnings beat.
For 2022, the company now expects net revenue to be in the range of $7.86 billion to $7.94 billion, representing a three-year compound annual growth rate (CAGR) of approximately 26 percent. Projections initially ranged between $7.61 billion and $7.71 billion. When compared to 2021, anticipated revenue growth would range between 25.7 percent and 26.9 percent.
Diluted earnings per share are expected to be in the range of $9.82 to $9.97 for the year and, excluding the gain on the sale of an administrative office building, adjusted diluted earnings per share are expected to be in the range of $9.75 to $9.90. The adjusted numbers are up from the previous guidance of $9.35 to $9.50 per share.
Lululemon now expects to open approximately 75 net new company-operated stores in 2022, up modestly from the prior guidance of approximately 70. The company says it will open 25 net new company-operated stores in the third quarter, after opening 21 globally in the second quarter. In total, Lululemon had 600 stores at the end of the period.
In the third quarter, Lululemon expects net revenue to range between $1.78 billion and $1.81 billion, representing a three-year CAGR of approximately 25 percent. On a year-over-year basis, projected revenue growth in the quarter would range between 18.7 percent and 20.3 percent. Diluted earnings per share are expected to be in the range of $1.90 to $1.95 for the quarter.
Luluemon’s performance in the second quarter gave CEO Calvin McDonald much to be excited about, particularly since it continues to rely on its premium status to drive sales. Although the company has taken “modest” price increases on approximately 10 percent of its assortment, he said the brand has not experienced any price resistance.
“Transactions by existing guests increased in the high teens,” McDonald said in an earnings call. “Traffic across channels remains robust with store traffic up over 30 percent and e-commerce traffic increasing over 40 percent. And importantly, we are not creating this traffic through markdowns or price promotions. Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy and we have no plans to do so.”
Helping the business further, McDonald noted the “promising signs of improvement” in the supply chain.
“We currently have no closures across our vendor base,” said McDonald. “And in China, vendors who had to close their slow production in quarter one due to Covid-19 are beginning to catch up. Ocean delivery times are improving, although they remain significantly elevated compared to the pre-Covid period. And while we continue to strategically leverage air freight to help ensure timely delivery of product into our distribution centers, we are seeing these rates begin to come down.”
Inventories at the end of the second quarter of 2022 increased 85 percent to $1.46 billion compared to $789.8 million at the end of the second quarter of 2021. On a unit basis, inventory increased 64 percent, representing a three-year compound annual growth rate of 38 percent, which is inclusive of two percentage points for in-transit inventories. The company believes its inventories are well positioned to support its expected revenue growth in the third quarter.
The near-doubling of the inventory came after the brand was “under-inventoried” at this time in 2021, McDonald said.
Meghan Frank, chief financial officer of Lululemon, elaborated on this further, saying that the retailer likely left demand on the table last year. Frank further keyed on the inventory strategy for the remainder of the year.
“We continue to leverage our core assortment, which comprises approximately 45 percent of our inventory. Looking forward, on a one-year dollar basis, we expect the inventory growth rate at the end of Q3 to be slightly higher than the levels we saw at the end of Q2, before the growth rate moderates to 50 percent to 60 percent at the end of Q4,” said Frank. “Our expectation of Q3 ending inventory now being the high-water line, when looked at on a one-year basis, is being driven by better on-time performance at our vendors, which is allowing us to receive products sooner than we initially expected. This is also allowing us to use less air freight.”
Gross profit increased 25 percent to $1.06 billion and gross margin decreased 160 basis points (1.6 percentage points) to 56.5 percent from 58.1 percent in the year prior.
The gross margin decrease was driven primarily by a 150-basis-point (1.5-percentage-point) decrease in product margin. Second-quarter product margin included an increase of approximately 130 basis points (1.3 percentage points) in air freight related to macro supply chain challenges. Markdowns were 30 basis points (0.3 percentage points) higher than a year ago, given low inventory levels and out of stocks last year.
Lululemon also maintained its Power of Three x2 growth plan laid out in April, which 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. The updated plan came after the yoga wear seller doubled both its men’s and digital businesses two years ahead of schedule.
As far as international growth goes, China saw sales rebound in the quarter after the Covid-related lockdowns and capacity constraints caused a slow start the year. Sales in China grow 30 percent on a year-over-year basis.
Lululemon has put serious effort into growth in the market, opening eight stores in Mainland China alone in the second quarter. The company operates 40 stores in Tier 1 cities, 25 stores in Tier 2 cities and 14 stores in Tier 3 cities, and recently launched a digital flagship on JD.com.
The company saw sales in Europe jump 20 percent. And after already opening its local e-commerce site in Spain, Lululemon will be opening its first two stores in the market in Barcelona and Madrid shortly.
The brand ended the second quarter with $498.8 million in cash and cash equivalents and the capacity under its committed revolving credit facility was $394.8 million.
Net Revenue: Second-quarter net revenue at Lululemon increased 29 percent to $1.87 billion, from $1.45 billion in the year-ago quarter. Net revenue increased 28 percent in North America, and increased 35 percent internationally.
Total comparable sales increased 23 percent year over year, or 25 percent on a constant-dollar basis. Comparable store sales increased 16 percent from the prior-year period, or 18 percent on a constant dollar basis.
Direct-to-consumer net revenue increased 30 percent, or 32 percent on a constant dollar basis. Direct-to-consumer net revenue represented 42 percent of total net revenue compared to 41 percent for the second quarter of 2021.
Brick-and-mortar store sales increased 30 percent compared to last year.
Net Earnings: Net income came in at $289.5 million, increasing from last year’s $208.1 million.
Diluted earnings per share were $2.26 compared to $1.59 in the second quarter of 2021. Adjusted diluted earnings per share were $2.20, compared to the prior-year period’s $1.65 per share.
Income from operations increased to $401.2 million, with operating margin improving 140 basis points (1.4 percentage points) to 21.5 percent.
CEO’s Take: McDonald highlighted NPD Group data to point out that Lululemon was the largest share gainer in the second quarter in the activewear market at 1.4 points.
“The first half of this year is really a consistent narrative of new category expansion, driving awareness through a number of earned media opportunities, as well as us continuing our investment in collective and community and reactivating some events,” McDonald said. “We have great product that’s driving new guest acquisition and an existing guest that continues to be engaged. The expansion of both our core and play activities, be it golf, tennis, hike—those are resonating very well. They’re lifting our core sales. It’s a combination of the levers that we’ve been working toward, and it has translated into market share gain in the quarter.”