Lululemon continued its string of strong earnings results in the third quarter with 28 percent revenue improvement and 37 percent growth in operating income, but market concerns over the group’s 85 percent inventory expansion and a gross margin decline sent its shares down more than 6.2 percent in after-market trading yesterday.
CEO Calvin MacDonald told analysts that the brand’s Black Friday results, the day after the American Thanksgiving holiday, were its strongest ever in terms of revenue and traffic. “The external environment remains challenging, but I am confident in our brand’s positioning,” he added.
The company defended its inventory position of $1.7 billion against $900 million in Q3/21, saying it is in line with expectations and that the level a year ago was too low. Approximately 45 percent of existing merchandise is in core styles. Lululemon continues to experience supply chain improvement, with delivery times improving from 70 days last year.
Net income increased 36.0 percent to $255.5 million from $187.8 million for the period ended Oct. 30, as total revenues came in at nearly $1.86 billion versus $1.45 billion in the year-ago period. Gross margin was down 130 basis points to 55.9 percent from 57.2 percent, negatively impacted by a 40-basis point drop in product margin. Markdowns versus Q3/2019 were described as “largely flat.”
In Q3, sales outside North America rose 42 percent with China, although below expectations due to Covid-related shutdowns, increasing nearly 70 percent year-over-year. With a standing objective to quadruple the revenue size of its business outside North America between 2021 and 2026, Lululemon recently entered Spain and opened a store on the Champs Èlysées in Paris. Meanwhile, the U.K. and Australian markets have added ship-from-store and endless aisle features for customers. In China, where the group currently operates 88 doors, there was a brand marketing push behind World Mental Health Day in October. The group ended the period with 623 stores worldwide, including 71 doors that have opened since 2021.
North American revenues increased by 26 percent. By channel, store sales jumped by 16 percent and e-commerce sales improved by 46 percent. Sales of men’s (+28%), women’s (+23%) and accessories (+52%) were each up by double digits. Direct-to-consumer revenue on a constant-currency basis increased 34 percent as the group launched its two-tier membership program and re-launched its 10K run events in Atlanta and Houston. Digital sales, which equaled $767 million during the period, are up 46 percent on a three-year CAGR.
On the marketing front, Lululemon executives are pleased with early results from the brand’s new “Like New” initiative that is available in 390 stores and all 50 U.S. states, saying it aiding with the guest acquisition on the re-sale side and spending by existing guests who are selling their merchandise.
Lululemon’s current FY22 outlook calls for a revenue range of $7.944-$7.994 billion, equal to a three-compound annual growth rate of about 26 percent, but with a low-end below analysts’ average estimate. The annual diluted EPS range is currently $9.94-$10.04.
