Although Lululemon Athletica continued on its upward trend since the start of the year, with results for its third fiscal quarter surpassing expectations, its shares dropped by 3 percent as it issued a weaker-than-expected outlook for the fourth quarter.
Revenues for the three months ended Oct. 28 were up by 21 percent from the year-ago quarter to $747.7 million, or by 22 percent on a constant dollar basis. Comparable sales jumped by 17 percent, while 13.8 percent was expected by analysts.
The management attributed these higher-than-expected sales to a revamped e-commerce platform, which increased both online traffic as well as actual digital sales. It said that web traffic increased by more than 35 percent in the quarter. The company's expansion into men's apparel also contributed to revenue growth, as well as outerwear. Lululemon said it is ahead of schedule to reach $1 billion in sales in 2020.
The company's sales have now topped estimates for more than two years. But the company indicated that this might be changing, as it issued a weaker-than-expected outlook for the fourth quarter, with revenues anticipated to reach $1,130 million, while investors were expecting a busier holiday season. While Lululemon said it experienced its biggest day ever for e-commerce on Thanksgiving, which was then surpassed by Black Friday, Cyber Monday ended being less successful.
On a comparable store basis, sales advanced by 6 percent in the quarter, or by 7 percent on a constant dollar basis. Meanwhile, online sales soared by 46 percent in constant currencies. Last year, the company heavily invested in its e-commerce platform. The management boasted about the improved functionality, the more compelling contents and storytelling and the improved product imagery on its new website. Direct to consumer revenues represented 25.3 percent of total revenues, compared with 21.2 percent for the third quarter of fiscal 2017.
Lululemon has also expanded its men's offerings. In 2017, it completed 12 co-location projects where it increased the size of some of its most productive stores to allow more space for its men's collection, while creating additional space for potential future category expansion. In 2018, Lululemon has been accelerating this program with approximately 20 to 25 stores planned in this format for the year. The management said that men posted some of the company's highest overall category increases. During the quarter, it launched an exclusive capsule with Mr Porter, an online men's shop. The collection consists of 18 styles and is available in select Lululemon stores internationally and online globally at mrporter.com.
On the product side, Lululemon pointed out that innovation drove demand and that comparable sales increased in the double digits in all major categories. Outerwear was particularly strong on both the men's and women's side, with comparable sales increasing by over 150 percent and 40 percent, respectively. The company expanded the assortment relative to last year by offering more tougher and water-resistant styles, including the Cloudscape Jacket for women and the Outpour Parka for men.
By region, North America witnessed accelerating traffic in the stores, which the company attributed to its omnichannel focus. Ship-from-store is now available at nearly 300 locations and buy online, pick-up in-store is now live in 35 stores.
Meanwhile, total market growth in Asia and Europe went up by more than 50 percent in both regions. In China, the management continues to see strength within its digital business, which grew by 76 percent, with a two-year increase of over 200 percent. At the end of October, Lululemon opened its first store in Osaka, Japan.
In Europe, Lululemon held its first Sweatlife Festival in Berlin, where it connected guests with local studios and teachers to celebrate the expanding fitness landscape. And in Paris, it opened a shop-in-shop in Le Bon Marché, a Parisian department store.
Overall, the company ended the quarter with 426 stores globally, eleven more than at the start of the three-month period.
The gross margin gained 2.4 percentage points to 54.4 percent in the quarter, while the operating margin jumped by 4.4 percentage points to 18.2 percent. Net income climbed by 60.2 percent to $94.4 million.
Despite a weaker-than-expected guidance for the fourth quarter, Lululemon increased its revenue forecast for the full year to a range of $3,240 million to $3,250 million, compared with a previous range of $3,190 million to $3,240 million.