Lululemon Athletica surpassed Wall Street estimates across sales and earnings in its third quarter, reeling in a net revenue increase of 22 percent to $1.12 billion, beating expectations of $1.02 billion by analysts polled by Refinitiv. The athletic apparel and athleisure retailer also earned an adjusted $1.16 per share, far outpacing the 88 cents expected.
In a Nutshell: Lululemon appears to be beating its own expectations as well. For the fourth quarter, Lululemon expects total sales to increase in the “mid-to-high teens,” up from its initial projection of a “high-single to low-double-digit” jump, new chief financial officer Meghan Frank said in the company’s earnings call Thursday. Frank also highlighted that she expects adjusted earnings per share to increase in the “mid-single digit range,” up from the prior expectations of a modest decline.
The company anticipates its stores will generate 70 percent of the revenue they did during the holiday period last year. Due to the uncertainty related to the Covid-19 pandemic, which forced the retailer to temporarily shut a handful of its stores again, Lululemon is not offering a full outlook for 2020.
Total inventories at the end of the third quarter increased 23 percent to $771 million compared to $627.1 million to close last year’s third quarter. Even ahead of a potential vaccine, CEO Calvin McDonald indicated that the elevated inventory total is to “make sure that we have the product to satisfy the demand.”
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“Our newness and innovation pipelines remain healthy, very strong and we haven’t pulled back on any of those,” McDonald said in the call.
McDonald also gave a timeline for Lululemon’s previously teased footwear launch, with the athleticwear retailer expecting to introduce its first shoe line in the “back half of 2021,” with the product hitting shelves in early 2022. The retailer tested a sneaker line from Athletic Propulsion Labs in August 2017 in some of its stores across the U.S. McDonald first revealed the company had plans to develop its own footwear during an analyst meeting in April last year.
The company opened nine net new company-operated stores during the quarter, ending with 515 stores, and remains on track to open 30 to 35 net new stores globally in 2020.
During quarter, the athleticwear retailer debuted 18 shop-in-shops for its recently acquired Mirror fitness platform to test and learn how to refine the Lululemon store selling experience. The company plans to expand this concept to “several hundred” stores next year, according to McDonald.
Mirror, the at-home virtual workout technology that Lululemon bought for $500 million, looks to be a major loyalty play for the brand, especially if shoppers have one in their own home.
“This creates a human connection and allows customers to connect with Lululemon from their own home, even in between transactions—a key to creating long term brand loyalty,” said Kate Hogenson, senior loyalty and CX consultant at loyalty marketing solution provider Kobie. “Mirror gives Lululemon new ways to maximize customer data collected from these different avenues—whether it’s an athleisure purchase or a Mirror workout. Each facet of Lululemon’s planned loyalty strategy could enable them to keep their current momentum and move the brand closer to its customers through emotional, transactional and engagement data—especially during this new age of digital.”
Frank estimates a 50 percent overlap between Lululemon and Mirror customers. The company continues to expect Mirror to generate in excess of $150 million in revenue in 2020.
From a product standpoint, Lululemon is confident in its go-ahead mix. The women’s business has returned to pre-Covid growth rates, with the total category growing 22 percent with strength in tops and bottoms. Men’s total revenue grew 14 percent, with bottoms leading the way due to a resurgence in sales of signature pants such as the Commission and its ABC Collection.
“Although [men’s is] slightly behind our women’s growth, it has in fact accelerated faster from the first quarter impact of Covid,” McDonald said. “[Our male customer] just wasn’t shopping to the same degree out of the gate as [our female customer] was and that’s in the market. We’ve continued to put on share with our men’s business.”
Gross profit increased 24 percent to $627.4 million and gross margin increased 100 basis points (1 percentage point) to 56.1 percent.
The company ended the third quarter of fiscal 2020 with $481.6 million in cash and cash equivalents and the capacity under its committed revolving credit facilities was $697.3 million.
Net sales: Lululemon’s third-quarter net revenue increased 22 percent to $1.12 billion from $916.1 million. On a constant-dollar basis, net revenue increased 21 percent.
Broken out into regions, net revenue increased 19 percent in North America, and increased 45 percent internationally. China saw net revenue jump more than 100 percent in the quarter, while e-commerce revenue across Europe accelerated nearly 160 percent.
Total comparable sales, including e-commerce sales, increased 19 percent, or 18 percent on a constant-dollar basis. Comparable store sales decreased 17 percent, or 18 percent on a constant-dollar basis. Comparable store productivity—calculated as the percentage of the net revenue generated from company-operated stores in the corresponding period of the prior year—was 83 percent, above the 75 percent target set by Lululemon ahead of the quarter.
Revenue from the direct-to-consumer e-commerce business increased 94 percent to $478 million, with the category representing 42.8 percent of total net revenue compared to 26.9 percent for the third quarter of fiscal 2019.
Net earnings: Net income for Lululemon reached $143.6 million in the third quarter, a nearly 14 percent boost from $126 million in the year-ago quarter. Adjusted when excluding $7.5 million in costs related to the Mirror acquisition, net income increased to $151.2 million.
Diluted earnings per share were $1.10 compared to 96 cents per share last year, while adjusted diluted earnings per share were $1.16 for the quarter.
Operating income increased 17 percent to $204.9 million, while adjusted operating income increased 21 percent to $213.5 million.
CEO’s Take: McDonald said Lululemon is still in the “early stages of growth” within its product innovation pillar, and has “ample ways” to expand key categories, including run, train, yoga and on the move.
“Our women’s business is far from its potential, and what we saw this quarter was new guests coming in, our existing gusts broadening out from some of the core categories as we’ve introduced newness, as we also innovate behind those. We introduced the cloud bra. Bras have been a big opportunity for us that we see with our female guests, and they’ve responded incredibly well. We saw really strong share growth, so I’m excited about that continual growth and women’s both through new guests, as well as migrating them into new categories.”