Lululemon Athletica increased guidance for sales and earnings guidance following a strong top and bottom line showing in the third quarter ended Oct. 31. The upgrade for the year came despite an unimpressive performance by its connected fitness business, Mirror, and higher airfreight costs amid ongoing global supply chain constraints.
Lululemon now anticipates revenues of $6,250 million to $6,290 million for the full financial year, as compared to previous guidance of $6,190 million to $6,260 million, although the company warned that the macroeconomic situation remains uncertain and there are still several important shopping weeks ahead. The gross margin is seen expanding by 1.00 to 1.50 percentage points on the year earlier.
However, Mirror sales for the full year are now projected at between $125 million and $130 million, down from $170 million last year and well below the range of $250 million to $275 million that it had anticipated in June.
In the third quarter, Lululemon’s revenues rose by 30 percent versus the year earlier to $1,450.4 million, and they were 28 percent higher on a constant currency basis. The management indicated that the growth could have been higher, as demand outweighed the available supply for the second consecutive quarter. On a comparable basis, sales were up by 27 percent, with comparable store sales growth of 32 percent and e-commerce growth of 23 percent. E-commerce sales in the quarter totaled $586.5 million, representing 40.4 percent of total revenues versus 42.8 percent in the year-ago period. Compared with the third quarter of 2019, revenues were up by 58 percent, representing a two-year compound average growth rate (CAGR) of 26 percent.
On a geographical basis, Lululemon’s third-quarter revenues showed increases of 28 percent in North America and 40 percent in the rest of the world as compared to the prior year, and they were up by 23 percent and 42 percent, respectively, on a two-year CAGR basis. Also on a two-year CAGR basis, sales jumped by more than 70 percent in China, while the growth in Europe exceeded 20 percent. The company highlighted broad-based strength over most of its key markets and an improving brick-and-mortar business in the U.K. following prolonged Covid-19 lockdowns.
In the third quarter, the men’s business grew by 44 percent and women’s revenues grew by 24 percent against the year earlier, leading to a two-year CAGR for the two segments of 24 percent and 29 percent, respectively. Calvin McDonald, the company’s CEO, pointed to “very balanced growth across categories, top, second layer, bottom, short skirts and into the men’s sweat categories and across our activities.”
The total number of company-operated stores rose by a net 18 in the quarter, including 12 new units in Asia-Pacific, four in North American and two in North America, ending up with a global network of 552 points of sale. Lululemon said it is on track to add 50 to 55 company-owned stores in 2021, of which 40 to 45 stores will be located outside North America.
Lululemon’s gross margin stood at 57.2 percent in the quarter, up by 1.10 percentage points on the year earlier, benefitting from 0.6 percentage points of occupancy and depreciation leverage, 0.3 percentage points from favorable foreign exchange rates and 0.2 percentage points from product margins. The latter were boosted by lower markdowns, partially offset by a negative contribution of 2.3 percentage points from higher airfreight costs.
The operating margin decreased by 0.5 percentage points to 17.8 percent while the adjusted operating margin widened by 0.3 points to 19.4 percent. Net profit grew by 31 percent to $187.8 million while adjusted earnings per share jumped to $1.62 from $1.16 the year earlier and $0.96 in 2019, above analysts’ expectations of $1.41.
Total inventories at the end of the third quarter were up by 22 percent on the year earlier to $943.9 million, slightly ahead of the company’s most recent expectations of 15 to 20 percent growth. They reflected efforts to mitigate supply chain risks by prioritizing production to ensure that key styles are manufactured first while strategically increasing the use of air freight. Lululemon said all its factories in Vietnam have reopened and are ramping up capacity.
Capital expenditures during the quarter jumped to $122 million from $66 million in the third quarter of 2020, with spending during the quarter primarily related to store capital for new locations, relocations and renovations, alongside supply chain and IT investments.
Lululemon said it was pleased with its performance at the start of the holiday season, with e-commerce volumes setting a record on Thanksgiving Day. Given supply chain disruptions, it expects that consumers may have started holiday shopping earlier this year.
For the fourth quarter, Lululemon projects revenues of $2,125 million to $2,165 million and adjusted EPS of $3.25 to $3.32. The gross margin is expected to be flat versus 2019, after 4.5 percentage points of pressure as compared to two years ago from airfreight costs due to port congestion and capacity constraints.
