Citing its balanced growth across channels, categories, and markets, Lululemon reported annual revenue growth of 30 percent in FY22 to $8.11 billion from $6.26 billion, with North American sales increasing 29 percent and jumping 35 percent everywhere else. But the group’s decision to take a $407.9 million impairment charge related to its Mirror business negatively impacted annual operating and net income.
FY22 operating income was essentially flat at $1.33 billion as net profitability slipped by 12 percent to $854.8 million from $975.3 million. Excluding the goodwill and impairment charge related to Lululemon’s decision to shift the Mirror business to a digital and app-based solution from hardware only, the company’s year-over-year net income was up 29 percent to more than $1.26 billion. FY22 gross margin fell by 230 basis points to 55.4 percent from 57.7 percent.
| Lululemon | |||
|---|---|---|---|
| Q4 ($ thousand) | |||
| 2022 | 2021 | Change | |
| Net revenue | 2,771,838 | 2,129,113 | 30.2% |
| Cost of goods sold | 1,244,219 | 892,941 | 39.3% |
| Gross profit | 1,527,619 | 1,236,172 | 23.6% |
| SG&A expenses | 803,107 | 641,959 | 25.1% |
| Acquisition-related expenses | – | 1,460 | – |
| Income from operations | 314,426 | 590,556 | -46.8% |
| Other income | 3,709 | 176 | 2007.4% |
| Pre-tax | 318,135 | 590,732 | -46.1% |
| Tax | 198,324 | 156,228 | 26.9% |
| Net | 119,811 | 434,504 | -72.4% |
| Diluted EPS | 0.94 | 3.36 | -72.0% |
| FY ($ thousand) | |||
| Net revenue | 8,110,518 | 6,256,617 | 29.6% |
| Cost of goods sold | 3,618,178 | 2,648,052 | 36.6% |
| Gross profit | 4,492,340 | 3,608,565 | 24.5% |
| SG&A expenses | 2,757,447 | 2,225,034 | 23.9% |
| Acquisition-related expenses | – | 41,394 | – |
| Income from operations | 1,328,408 | 1,333,355 | -0.4% |
| Other income | 4,163 | 514 | 709.9% |
| Pre-tax | 1,332,571 | 1,333,869 | -0.1% |
| Tax | 477,771 | 358,547 | 33.3% |
| Net | 854,800 | 975,322 | -12.4% |
| Diluted EPS | 6.68 | 7.49 | -10.8% |
| Source: Lululemon | |||
In Q4, Lululemon’s total revenues and earnings per share exceeded analyst forecasts. Period sales rose by 33 percent on a constant-currency basis to $2.77 billion from $2.13 billion as comparable store sales gained 17 percent. Direct-to-consumer revenues increased by 37 percent to equal 52 percent of the period’s sales or $1.4 billion. Consumer traffic increased 30 percent in stores and 45 percent across e-commerce sites and apps globally. According to NPD, as cited by company executives, the adult active apparel market fell by 5 percent in the U.S. during the period as the brand gained 2.3 points of market share. In China, where the group recently opened its largest Asia-Pacific store in Shanghai, sales rose by 30 percent year-over-year. During 2022, the company opened 81 owned and operated stores to end the year with 655 doors.
Final period operating income slipped by 47 percent year-over-year to $314.4 million from $590.6 million but rose by 33 percent on an adjusted basis to $785.3 million. Net income was down by 72 percent to $119.8 million from $434.5 million. The quarterly gross margin fell by 300 basis points to 55.1 percent from 58.1 percent, but the product margin increased by 30 basis points, aided by lower air freight costs.
Lululemon’s inventory at FY22 end was $1.4 billion, up by 50 percent year-over-year and modestly below the group’s expectation of 60 percent expansion. Core, seasonless inventory remains approximately 45 percent of the on-hand merchandise mix. Inventory projections for the end of Q1 call for 30 to 35 percent year-over-year growth, with the percentage increase forecast to be in line with sales growth in H2.
On the Mirror business, senior executives confirmed that the hardware is not being eliminated. Instead, an app feature is being added this summer that will allow customers to sign up, pay a lower monthly subscription fee and access the same content without having to purchase hardware. Currently, the Mirror segment is a “very small portion” of Lululemon’s overall revenues and will likely remain that way through the company’s five-year growth plan.
Looking ahead, Lululemon forecasts 15 to 16 percent revenue growth in 2023 to between $9.3 billion and $9.41 billion. Owned square footage growth will increase in the low double digits, including 30 to 35 in markets outside North America, with the majority in China, 40 to 45 owned and operated stores, and 25 co-located remodels. Meanwhile, lower air freight costs are expected to contribute to a 140- to 160-basis-point improvement in annual gross margin, driven by a 150-basis-point decline in air freight expense. Full-year markdowns are forecast to be on par with FY22 levels.
On the investment front, Lululemon will spend $660 to $680 million on capital expenditures in FY23, including costs related to expanding its distribution network. Those projects include a new distribution center in the Los Angeles area and enlarging centers in Columbus, Ohio, and Toronto, Canada.
