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Lululemon: Vietnam Outbreak Impacts 20% of Second-Half Inventory

Lululemon Athletica says it will surpass its 2023 revenue targets by the end of this year, two years ahead of schedule, as net revenue totals increased 61 percent to $1.45 billion on net income of $208.1 million. With the strong quarter, the company raised its full-year outlook for the second time.

In a Nutshell: Lululemon CEO Calvin McDonald said the company will likely achieve its goal to double its men’s business this year. The athleisure brand remains on track to quadruple its international business by 2023, if not sooner, he said.

On a two-year, compound annual growth rate (CAGR) basis, women’s product revenue jumped 26 percent, while men’s grew 31 percent.

“We continue to see our brand gaining market share across categories men’s and women’s equally,” McDonald said in the call. “I know the total addressable market (TAM) has been impacted by those macro trends. We’re well positioned within that TAM to address it in a very effective, leading way. This brand is early innings across product, with activities where we focus on run, train, yoga and on-the-move (OTM), as well as categories within those activities.”

McDonald reiterated Lululemon’s Impact Agenda, noting that the company wants 100 percent of products to be made with sustainable materials, with the help of budding partnerships with mushroom-based leather producer Mylo, carbon emissions recycling firm Lanzatech and its most recent partnership with Genomatica, a materials disruptor that transforms plant-based ingredients into materials like nylon. The CEO said the brand does “not factor in any marginal impact” from the focus on sourcing more sustainable materials.

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Inventories increased 17 percent to $789.8 million at the end of the second quarter, compared to the prior-year quarter. Chief financial officer Meghan Frank indicated that the athleticwear seller is mitigating supply chain risks by shifting production out of Vietnam where possible with vendors that operate in multiple countries, as well as prioritizing the production of key fall holiday styles and strategically increasing its use of air freight.

Frank said pandemic-related Vietnam factory closures have impacted 20 percent of the brand’s second-half inventory. In total, Lululemon sources approximately 30 percent of finished goods from the nation. Frank expects the factories to begin to reopen later this month.

In the third quarter, Lululemon expects inventory levels to increase approximately 15 percent to 20 percent on a year-over-year basis. While this level of inventory can support the company’s increased revenue guidance, it is lower than the brand had initially targeted due to supply chain challenges, Frank said.

Gross profit increased 72 percent to $842.7 million in the quarter, while gross margin increased 390 basis points (3.9 percentage points) to 58.1 percent. The margin increase is a result of a dip in store occupancy and depreciation costs as a percentage of net revenue, as well as a decrease in distribution center and product department costs as a percentage of net revenue. On a two-year basis, gross margin increased 310 basis points (3.1 percentage points).

Although the air freight costs are expected to have a negative impact of as much as 200 basis points (2.0 percentage points), gross margin is still expected to increase 50 to 100 basis points (0.5 to 1.0 percentage points) in the quarter, thanks to higher e-commerce penetration and lower store occupancy costs.

Cash and cash equivalents were $1.2 billion at the end of the quarter, with the available capacity under its committed revolving credit facility totaling $397.2 million. Capital expenditures totaled $80.3 million, compared to $52.6 million in the year-ago period. The expenditures were primarily related to supply chain investments, capital for new store locations, relocations and renovations, and its digital channel, including analytic capabilities.

Lululemon revised its full-year guidance yet again, now expecting net revenue in the range of $1.4 billion to $1.43 billion, diluted earnings per share in the range of $1.28 to $1.33 in the quarter, and adjusted diluted earnings per share in the range of $1.33 to $1.38.

For 2021, the yoga pants purveyor anticipates net revenue in the range of $6.19 billion to $6.26 billion, ahead of the previous range of $5.82 billion and $5.9 billion. Diluted earnings per share are expected in the range of $7.16 to $7.26 for the year, in front of the previous projections of $6.52 to $6.65. Adjusted diluted earnings per share are expected to be in the range of $7.38 to $7.48, up from the prior expectations of $6.73 to $6.86 per share.

Net Sales: Total net revenue increased 61 percent to $1.45 billion on a year-over-year basis, compared to $902.9 billion generated in the 2019 quarter. Net revenue increased by $567.3 million over 2019 totals, or 64 percent, representing a two-year CAGR of 28 percent.

Company-operated store revenue totaled $695.1 million, or 47.9 percent of total revenue, compared to $287.2 million, or 31.8 percent of total revenue, in the year-ago quarter. The metric increased 142 percent from the year prior, and 9 percent on a two-year CAGR basis.

Store traffic jumped over 150 percent versus last year.

E-commerce revenue increased 8 percent, or 4 percent on a constant dollar basis, to $597.4 million. The e-commerce total represented 41.2 percent of total revenue, compared to $554.3 million, or 61.4 percent of total revenue, in the 2020 second quarter. E-commerce net revenue increased 66 percent on a two-year CAGR basis.

Net revenue increased 63 percent in North America, and 49 percent internationally.

Other revenue, which includes net revenue from outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, as well as the sales of in-home fitness equipment and associated content subscriptions, totaled $158.1 million, or 10.9 percent of total net revenue.

Net Earnings: Net income totaled $208.1 million, or $1.59 per diluted share a year ago, versus from the $86.8 million in the 2020 quarter, which amounts to 66 cents per diluted share. In the 2019 quarter, the company took in $125 million on 86 cents per diluted share.

Adjusted diluted earnings per share in the quarter were $1.65 compared to 74 cents in the second quarter of 2020.

Operating income was $291 million, up 134 percent from $124.4 million in the second quarter of 2020. Adjusted operating income, which excludes acquisition-related expenses from Mirror, increased 120 percent to $299.2 million, compared to $135.9 million a year ago.

CEO’s Take: McDonald acknowledged the pricing pressures of recent supply chain disruptions, but doesn’t foresee any significant changes ahead.

“We look for opportunities both where we could price up and/or price down to be positioned in the marketplace, based on assortment and range work so it’s pretty fluid,” McDonald said. “We’re comfortable with our position today and addressing it, but all and any pricing changes would be in [our] guidance and there’s nothing of significance planned, or that you should expect.”