Lululemon stays on strong course, no change to markdown strategy

Lululemon’s net income rose 39 percent to $289.5 million from $208.1 million as total revenues increased by 28.8 percent to $1.87 billion from $1.45 billion. Operating income was 38 percent higher at $401.2 million versus $291.0 million. Gross margin slipped by 160 basis points to 56.5 percent from 58.1 percent, driven by a 150 b.p. decline in product margin, 130 b.p. increase in air freight costs and 30 b.p. impact from markdowns, higher than in 2021 but flat with 2019. 

Balance across product categories, genders and geographies continues to drive topline growth at Lululemon, which intends to launch a two-tiered membership program in North America in H2 and has upped its annual own store growth to 75 from 70 this year to include 45 in international markets. During Q2, men’s sales rose 27 percent, women’s increased 24 percent, and accessory sales were 50 percent higher. There was a 24 percent sales spike among newcomers to the brand and a 17 percent gain among existing customers. Store traffic increased 30 percent during the period and 8 percent on a three-year CAGR. Digital traffic was 40 percent higher in the period and up by the same percentage over a three-year CAGR. Citing NPD data, management said the brand gained four market share points in the period. Lululemon has implemented modest price increases on 10 percent of its range without experiencing any customer resistance.

North American sales rose by 28 percent. Revenues outside the U.S. were up by 35 percent, and the company still intends to quadruple them over time. In Europe, sales growth rose 20 percent and 22 percent on a three-year CAGR with increases in all markets. Following the establishment of a dotcom business in Spain during Q2, the company will open stores in Barcelona and Madrid this month. Later this year, the brand will debut on Les Champs-Elysées in Paris. Meanwhile, China experienced a 30 percent sales increase, helped by the brand’s investment in the local” Summer Sweat Games,” and was up 70 percent on a three-year CAGR. Lululemon has a new digital flagship store on JD.com and opened eight new stores to bring its country total to 79 (40 in Tier 1 cities, 25 in Tier 2 locales, and 14 in Tier 3 cities. 

While confirming some moderation in air freight and traditional delivery lead times for merchandise, senior management said it has no intention of changing the company’s approach to markdowns with current activity said to be at 2019 levels. Air freight costs, some 290 b.p. above the 2019 level, are forecast to moderate in H2. Traditional ocean deliveries that had risen to 90 days from a typical 45 days before the pandemic are now down to approximately 70 days. 

Lululemon’s current FY22 outlook calls for total revenues of $7.87-7.94 billion and e-commerce growth in the low- to mid-20s, with gross margins projected to fall 100-130 basis points due to increased costs within its distribution network and more normalized markdowns.