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Lululemon Execs Talk Air Freight, Price Hikes and Inventory Gaps

Lululemon saw third quarter sales increase 30 percent to $1.45 billion on net income of $187.8 million. The Vancouver yoga-gear company raised its full-year outlook after earnings per share and sales beat Wall Street expectations, according to a Refinitiv survey.

In a Nutshell: While Lululemon continues to experience supply chain issues related to port congestion and pricey air freight costs, CEO Calvin McDonald told Wall Street analysts that all of company’s Vietnam factories have reopened and are ramping up to capacity.

Speaking on the earnings call, chief financial officer Meghan Frank said she expects air freight pressures will peak in the fourth quarter, but sees supply chain pressures persisting through the first half of the year ahead.

The athleisure company saw growth across all of major categories, with women’s revenue increasing 24 percent, men’s growing 29 percent and accessories up 40 percent, all on a two-year CAGR basis.

On a year-over-year basis, Lululemon’s men’s business grew 44 percent. Sales in women’s, the company’s core business, were up 25 percent. Lululemon has said its plans to double its men’s division by 2023 are running ahead of schedule.

McDonald said he would have preferred to have more merchandise on hand in categories that the company was light on, including its high-selling outerwear goods.

Traffic is returning to Lululemon stores, increasing 50 percent in the quarter compared to last year.

Inventories at the end of the third quarter increased 22 percent to $943.9 million, compared to $771 million at the end of the quarter. This total was ahead of the recent expectations of a 15 percent to 20 percent expansion.

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McDonald noted that the company has been able to mitigate supply chain risks as 40 percent of its inventory is made up of seasonless core product.

Frank echoed this assertion, saying Lululemon has an advantage in the proportion of its inventory that largely eschews seasonal trends. “The team is actively looking at opportunities to capitalize on that core assortment and pull that forward where that makes sense for us,” she said.

Gross margin was 57.2 percent of net revenue compared to 56.1 percent of net revenue in the 2020 third quarter, and 55.1 percent in the 2019 period.

Lululemon lowered its revenue guidance for Mirror for the full year, to a projected range of $125 million to $130 million, well off initially anticipated sales between $250 million and $275 million. The company acquired the digital fitness startup in June 2020 for $500 million, right when pandemic-driven home fitness was peaking. B. Riley analyst Susan Anderson wrote in a research note to clients Friday that the firm has observed Lululemon offering Mirror at a $500 discount in an effort to gain customers.

The company said that it has grown Mirror subscribers 40 percent year over year.

Lululemon raised its fourth quarter guidance, expecting net revenue at $2.13 billion and $2.17 billion. Diluted earnings per share are projected to be in the range of $3.24 to $3.31 for the quarter and adjusted diluted earnings per share are anticipated to be in the range of $3.25 to $3.32. Additionally, Lululemon expects gross margin for the quarter to be flat with 2019, reflecting an impact of 450 basis points of pressure from air freight costs and port congestion.

For 2021, the company anticipates net revenue to be between $6.25 billion and $6.29 billion. Diluted earnings per share are expected to fall within the range of $7.38 to $7.45 for the year and adjusted diluted earnings per share are expected to be in the range of $7.69 to $7.76.

The company ended the third quarter with approximately $1 billion in cash and cash equivalents, while the capacity under its committed revolving credit facility was $396.9 million.

Compared to $66 million in the third quarter last year, capital expenditures were $122 million, primarily for new store locations, relocations and renovations, supply chain investment and technology to support business growth.

Net Sales: Net revenue at Lululemon increased 30 percent to $1.5 billion from the $1.1 billion taken in during last year’s period. On a constant-dollar basis, net revenue increased 28 percent.

On a two-year basis, net revenue increased 58 percent, representing a compound annual growth rate (CAGR) of 26 percent.

Total comparable sales increased 27 percent, or increased 26 percent on a constant-dollar basis, while comparable store sales increased 32 percent, or increased 31 percent on a constant dollar basis.

Direct-to-consumer (e-commerce) net revenue increased 23 percent to $586.5 million. On a constant-dollar basis, the channel’s net revenue increased 21 percent. DTC net revenue represented 40.4 percent of total net revenue compared to 42.8 percent for the third quarter of 2020.

Net revenue increased 28 percent in North America, and increased 40 percent internationally.

Net Earnings: Lululemon’s third-quarter net income rose to $187.8 million, from $143.6 million a year ago.

Diluted earnings per share were $1.44 compared to $1.10 in the third quarter of 2020, and above the 96 cents seen in 2019. Adjusted diluted earnings per share were $1.62 compared to $1.16 in the third quarter of 2020.

Operating income increased 26 percent to $257.9 million. Adjusted income from operations increased 32 percent to $282.1 million.

CEO’s Take: McDonald suggested that raw materials, shipping and labor aren’t the catalyst for any potential price hikes at Lululemon.

“We really do price to market and there are obviously a variety of inputs and consideration…but as a business that is positioned as a premium brand that has much innovation built into the product, we look at a variety of factors to make our pricing decisions,” McDonald said. “We won’t just do it unilaterally because of those pressures—we’ll look at other ways to manage the overall mix and maintain our committed margins.”