Lululemon Athletica’s share price jumped by 12 percent the day after the company announced very strong growth in sales and earnings for its first quarter, ended on May 2, beating analysts’ estimates. As customers returned to its brick-and-mortar stores and the e-commerce business continued to expand, albeit at a lower rate than before, the company’s total revenues went up by 88 percent to $1,226.5 million as compared to the same quarter a year earlier and were 83 percent higher on a constant-currency basis.
Total revenues were also up by 57 percent from the first quarter of 2019, representing a compound annual growth rate (CAGR) of 25 percent over a two-year period. It thus surpassed the 19 percent CAGR generated in the three years prior to the Covid pandemic.
Compared with the same quarter a year earlier, revenues at company-operated stores soared by 106 percent to $536.6 million, while revenues from e-commerce climbed by 55 percent to $545.1 million, with a 50 percent increase at constant currencies. The balance between the offline and online channels shifted for the vertically operating company, with the share of the offline business rising to 43.8 percent of the total turnover from 39.9 percent when most of its stores were closed by the pandemic, and the share of the online business declining to 44.4 percent from 54.0 percent.
Boosted by the acquisition of Mirror, “other revenues” – from outlets, temporary locations, sales to wholesale accounts, licensing and supply arrangements and the sale of in-home fitness equipment and content subscriptions - jumped to $144.8 million from $40.0 million.
First-quarter revenues increased by 82 percent in North America, but they went up by a higher rate of 125 percent in international markets. Calvin McDonald, Lululemon’s CEO, said the company still expects its international business to match the size of its North American operations in the near future, after representing 14 percent of the total in 2020. On a two-year CAGR basis, Lululemon said it has seen double-digit growth in all major regions, led by mainland China, where the two-year CAGR for revenues stood at 90 percent.
In line with its business plan, the growth in the men’s segment outpaced women’s growth on both a one- and two-year basis. On a two-year CAGR basis, sales grew by 23 percent in women’s and by 27 percent in men’s. The relatively new running category was boosted by a new marketing campaign emphasizing inclusivity and featuring several of the company’s endorsers.
The strong development of the top line led to a fivefold increase in Lululemon’s net profit to $145.0 million from $28.6 million the year earlier. The operating margin improved to 15.8 percent from 5.0 percent in the year-ago period, but was slightly lower than the 16.5 percent margin achieved in the first quarter of 2019.
The gross margin increased by 5.8 percentage points to 57.1 percent year-on-year in the latest quarter. It was 3.2 percentage points higher than two years earlier, driven by 2.2 percentage points of leverage on occupancy costs, depreciation and product team costs, an increase of 0.8 percentage points in product margin, and a positive foreign exchange impact of 0.2 points. These factors more than offset higher airfreight expenses related to logistics constraints.
As of June 3, the company had 90 percent of its stores open. Since the first quarter of 2021, Lululemon has added 34 new stores on a net basis, including two in the first quarter of 2021, both in the Asia-Pacific region. Lululemon had 523 company-operated stores at the end of the first quarter, up from 489 the year earlier. It now anticipates that it will open 45 to 55 net new company-operated stores this year – including 35 to 40 stores internationally - up from prior guidance of 40 to 50 doors.
Lululemon also raised its financial guidance for the full year. It is now targeting revenues of $5,825 to $5,905 billion compared with previous expectations of $5,550 to $5,650 billion. Mirror is on track to achieve previous guidance for full-year revenues of $250 to $275 million. For the present year, Lululemon forecasts an expansion of its gross margin of between 1.5 and 2.0 percentage points as compared to 2020, up from its prior forecast of a 1.0-1.5 points, despite an anticipated negative impact of 0.5 points from higher freight costs.
The gross margin is seen rising already in the second quarter by 0.3 to 0.5 percentage points. Lululemon foresees a modest decline in second quarter e-commerce sales, as last year’s second quarter marked the height of Covid-19 related channel shifts. On a two-year CAGR basis, e-commerce jumped in the first quarter by 61 percent, while brick-and-mortar sales were up by a tiny 3 percent.
