The yoga apparel specialist saw its net income progress by 14 percent in the third quarter to $143.6 million, rebounding from a 31 percent dip suffered in the second one, in spite of extra expenditures of $8.5 million related to the $500 million acquisition of Mirror. The gross margin rose by 1.0 percentage point to 56.1 percent, led by occupancy leverage and a positive foreign exchange impact of 0.1 percentage points, offset by lower product margins due to higher air freight costs.
Thanks to strong gains in e-commerce, and despite disruptions in its stores because of the Covid-19 pandemic, Lululemon Athletica managed to grow revenues by 22 percent to $1,117 million in the three months ended on Nov. 1, with a growth 21 percent in constant currencies. Comparable sales progressed by 19 percent, including a surge of 94 percent in direct-to-consumer e-commerce, with online sales accounting for 42.8 percent of sales, against 26.9 percent in last year’s third quarter. However, same-store sales dropped by 17 percent at the company’s physical stores due to restrictions linked to the pandemic.
The international segment was a strong point during the quarter, rising by 45 percent thanks to a strong performance in Asia-Pacific, especially in China where sales more than doubled. In Europe, Lululemon recorded a 160 percent gain in e-commerce, but store traffic was low. North American sales progressed by 19 percent, driven by women’s broader assortment. Men’s sales rose by 14 percent.
The demand for Lululemon apparel remained strong in the quarter, as many consumers had to exercise at home due to the rise of distant working and the fact that many gyms remained closed. The management indicated that it is planning to launch its first line of footwear in early 2022.
The management also pointed out that the company has accelerated investments in e-commerce, including website enhancements, building the omni-channel functionality, and increasing fulfillment capabilities. To cope with occupancy restrictions in store, the group has enabled virtual waitlists to notify customers via text when it is their turn to enter the store. It is part of what it calls its “omni-guest” experience, along with appointments for shopping and mobile point-of-sale.
The company opened over 70 seasonal pop-up stores, a record, with 30 more openings planned for the fourth quarter. 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.
Lululemon’s new membership program, launched last year, is still in test mode in only four cities: Denver, Chicago and Edmonton and most recently Toronto. It will be integrated with the membership program of Mirror, which is couple with the purchase of its wall-mounted mirror for streaming workout classes. The idea is to use the screen at a later stage for workouts for the whole family as well as remote learning and virtual medical visits.
Lululemon has integrated Mirror into its marketing programs, with a tab on its website. It has successfully tested the inclusion of Mirror as a shop-in-shop in a first batch of 18 stores. It will be extended to several hundred more Lululemon stores in 2021. Mirror is now expected to generate revenues of $150 million this year, $50 million more than originally budgeted.
The management said the recent shifts in behavior in terms of working and exercising from home are playing to the company’s strengths. While the brand 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 behavior likely to endure in the post-Covid-19 world.
Lululemon did not release any specific guidance for the full financial year. It expects comparable store sales to drop by about 30 percent in the holiday period, but believes this will be offset by e-commerce gains. As a result, total revenues for the fourth quarter should be up by mid- to high teens. The gross margin is expected to remain flat.
With 24 new stores opened so far in 2020, building up to a network of 515 units, the company is on track to add a total of 30 to 35 new locations for the full year.
