Thanks to strong gains in e-commerce, and despite disruptions in stores because of the Covid-19 pandemic, Lululemon Athletica managed to grow revenues by 2 percent to $902.9 million in the second quarter ended on Aug. 2, with a growth of 3 percent in constant currencies. Direct-to-consumer net revenues represented 61.4 percent of the total turnover as compared to 24.6 percent for the second quarter of the prior year.
The yoga apparel specialist saw its net income fall by 31 percent from the year-ago period to $86.8 milliont. The gross margin declined by 0.8 percentage points to 54.2 percent, due in part to a big online warehouse sale, while the operating margin dropped by 5.2 percentage points to 13.8 percent, partly because the company continued to pay its employees during the coronavirus-related lockdowns. The results were above the guidance and Wall Street estimates, yet the company’s share price declined by 3.2 percent at closing on Nasdaq yesterday in an overall bearish market.
Demand for Lululemon apparel remained strong in the quarter, as consumers had to exercise at home during the business lockdowns. Direct-to-consumer revenues soared by 155 percent to $554.3 million. It represented 61.4 percent of total turnover, compared to 24.6 percent for the second quarter of fiscal 2019.
Lululemon has been connecting with customers through apps and online, offering free workouts and other content, with a view to driving e-commerce. The strategy was implemented in China through WeChat, and in North America and Europe through Instagram. This helped mitigate a 51 percent decline in store revenues to $287.2 million.
The international segment was a strong point during the quarter. In China, the company says it is experiencing a strong rebound in its own stores with same-store sales up by over 30 percent, coupled with strength in e-commerce, which grew by more than 130 percent in the quarter. In Europe, Lululemon recorded a 160 percent gain in e-commerce. During the period, the company opened nine new locations across Asia and Europe, including its 100th location in Asia-Pacific.
The management said these results demonstrate the strength of the Lululemon brand, amid a shift in behavior in terms of working and exercising from home, as these trends play to the company’s strengths. While it remains committed to its ”power of three” growth plan, including the doubling of men’s, doubling of e-commerce and quadrupling international by 2023, Lululemon said that 2020 is likely going to be an inflection point for retail, with certain changes in customer behaviors likely to endure in the post-Covid-19 world.
In order to support its growth, the company has accelerated investments this year within its e-commerce channel which include developing site enhancements, building the omni-channel functionality and increasing fulfillment capabilities.
It currently has 97 percent of its stores open across the globe, although they are performing at only 75 percent of last year’s volume, due to their relatively small size, which limits the number of people who can be in the store at one time. To cope with this problem, it has enabled virtual waitlists to notify customers via text when it is their turn to enter the store. In the month of August alone, Lululemon had almost 400,000 users of this technology across nearly 280 locations where it is implemented.
This year, the group plans to have 30 to 35 more stores in place worldwide. In the latest quarter, Lululemon operated around 50 seasonal stores, and it plans to increase their network to approximately 70 in the second half of the year. The strategy for the holiday period will include seasonal stores in key centers and markets where it has existing stores to help mitigate the current capacity constraints.
Last month, the company expanded its On The Move collection with the introduction of new pant styles for both women and men. The company is also moving toward more inclusive sizing. This month, it will start to offer some of its core styles in sizes zero to 20. By the end of 2021, the majority of its women’s line will be available in more inclusive range of sizes.
Another highlight in the latest quarter as been the acquisition, announced in June, of Mirror, a home fitness start-up that sells a wall-mounted machine for streaming workout classes, for $500 million. It is now expected to generate revenues of $150 million this year, $50 million more than originally budgeted. The company is on track to begin offering the Mirror in 10 to 15 Lululemon stores in the U.S. by the beginning of the fourth quarter. Meanwhile, it will expand a membership program running in Chicago, Edmonton and Denver to Toronto.
Lululemon did not release any guidance for the full financial year, but said it expects sales to recover to a mid- to high-single-digit gain in the third quarter and a high-single to low-double-digit gain in the fourth quarter. The gross margin is expected to decline in the third quarter, but it should improve in the fourth one and show a gain for the second half. Operating income may decline by 10 to 15 percent in the third quarter, but it is expected to progress in the last three months of 2020.