Lululemon Athletica raised its outlook for sales and earnings after beating analysts’ estimates in the second quarter ended Aug. 1. Sending its stock market valuation up to an all-time high of €56.5 billion, the company said it is now on track to reach its 2023 target for its top line already this year, two years ahead of schedule, as it benefits from a shift in consumer spending toward athleisure.
For the full financial year, Lululemon is now projecting revenues of $6,190 to $6,260 million, up from its previous forecast of $5,825 to $5,905 million. Adjusted earnings per share (EPS) are seen coming in at $7.38 to $7.48 – or a net profit of $941 million at mid-point – against prior guidance of $6.73 to $6.86.
In the second quarter, the company’s total revenues increased by 61 percent to $1,451 million, beating a consensus of $1,340 million. They were 56 percent higher than a year ago on a constant currency basis, an up by 64 percent from the second quarter of 2019. The two-year compound annual growth rate for revenues stood at 28 percent, accelerating from the 25 percent rate seen in the first quarter and from a CAGR of 19 percent for the two years that preceded the Covid-19 pandemic.
Sales at company-operated stores amounted to $695.1 million, or 47.9 percent of total revenues, up 142 percent from the year earlier, when they accounted for 31.8 percent of the total and many retail locations were shut due to Covid-19. Their revenues increased by 9 percent on a two-year CAGR basis while their productivity returned to 2019 levels versus an 88 percent rate in the first quarter. Their productivity is expected to be slightly above the 2019 level in the third quarter.
Revenues from e-commerce of $597.4 million represented 41.2 percent of total revenues, increasing by 8 percent on the year earlier, when they accounted for 61.4 percent of total revenues. E-commerce revenues jumped by 66 percent on a two-year CAGR basis, above the company’s expectations of about 55 percent growth. On a comparable basis, they rose by 4 percent in the quarter, after already soaring by 157 percent last year, when they benefited from an online warehouse sale that was not repeated this year.
While sales of women’s products went up by 26 percent on a two-year CAGR basis, men’s saw a higher increase of 31 percent. International revenues rose by 43 percent on the same basis, while North America grew by 26 percent. As compared to a year ago, North American and international sales were up by 26 and 43 percent, respectively, with strong double-digit growth in all the regions.
The quarterly gross margin expanded by 3.9 percentage points from the year earlier to 58.1 percent, getting a 3.5 percentage point lift from a decrease in occupancy, depreciation, warehousing and product department costs as a percentage of revenues, driven primarily by the increase in revenues. A favorable foreign currency impact also gave a 0.6 percentage point boost to the margin. These effects were partially offset by a drop of 0.2 percentage point in product margins, resulting from Covid-19 impacts on logistics availability and costs, as well as higher inventory provision expenses, counterbalanced in part by lower markdowns.
The operating margin increased in the quarter by 6.3 percentage points to 20.1 percent, and it went up on an adjusted basis by 5.6 percentage points to 20.6 percent.
Net earnings more than doubled to $208.1 million from $86.1 million in the year-ago period. Excluding one-off items, earnings per share amounted to $1.65, a level Calvin McDonald, the company’s CEO, said was “significantly” ahead of its expectations and also beat an analysts’ consensus of $1.19.
For the third quarter, Lululemon expects revenues of $1,400 to $1,430 million, representing a two-year CAGR of about 24 to 25 percent, with adjusted EPS of $1.33 to $1.38.
The management stressed that the company’s growth has come despite industry-wide supply chain issues, noting that another wave of Covid-119 and related factory closures in Vietnam, ongoing issues at ports and reduced air freight capacity are contributing to supply chain disruptions and increased costs.
“Our business was particularly strong in quarter two and our guidance calls for the momentum to continue in the back half of the year,” McDonald said in a conference call with analysts. “But I think it’s fair to say that our business would have been even stronger without these challenges facing the industry.”
While aiming for year-on-year growth of 25 to 30 percent, Lululemon’s inventories ended up 17 percent higher than a year ago at the end of the second quarter, due to the supply chain disruptions. The management hopes to bring up the increase to between 15 and 20 percent by the end of the third quarter.
Lululemon continues to expect the gross margin for the full year to increase by 1.5 to 2.0 percentage points, driven by strong revenues and leveraged occupancy and depreciation, but its forecast now incorporates a negative impact of 1.5 to 2.0 percentage points from additional air freight costs.
Meghan Frank, Lululemon’s chief financial officer, said the company has shifted production out of Vietnam as best as it could, with suppliers who operate in multiple countries prioritizing production to ensure that key holiday styles are produced first. The company’s guidance assumes that Vietnam will begin a phased re-opening in mid-September. Lululemon normally sources about 30 percent of finished goods from Vietnam and about 20 percent of its second-half inventory is currently affected by Covid-related factory closures.
During the second quarter, Lululemon opened seven new directly operated stores in Asia-Pacific, three in the U.S. and one in Europe, ending the quarter with 534 stores, 28 more than a year earlier. The company says it is still on track to add 45 to 55 new locations this year.
Lululemon says it now has 150 Mirror shop-in-shops and plans for them to grow to 200 in time for the holiday season. However, the group is suspending a paid membership test for the Mirror application to study its results before going forward with the program.
