LululemonUS growth continues to slow, but the athletic apparel retailer is making big gains overseas, resulting in a 9% increase in year-over-year sales.
The yoga pants company on Thursday beat Wall Street expectations on both the top and bottom lines and said he is “happy” with the start of the holiday season. However, on a call with analysts, CEO Calvin McDonald took a cautious tone when discussing the company's fourth-quarter outlook.
“While we feel good about the start of the holiday season, we still have some big weeks ahead of us,” McDonald said. “With the shortened holiday shopping season, we're still thinking about our plans for the entire fourth quarter. “
Here's how Lululemon performed in its fiscal third quarter compared to Wall Street expectations, based on a survey of analysts by LSEG:
- Earnings per share: Expected $2.87 vs $2.69
- Income: $2.40 billion vs $2.36 billion expected
Shares climbed about 8% in extended trading Thursday.
The company's reported net income for the three months ended Oct. 27 was $352 million, or $2.87 per share, compared with $249 million, or $1.96 per share, a year earlier.
Sales rose to $2.40 billion, up about 9% from $2.20 billion a year earlier.
For the all-important holiday shopping quarter, Lululemon expects revenue to be between $3.48 billion and $3.51 billion, representing growth of 8% to 10% from the prior year. Analysts were expecting revenue of $3.50 billion, or growth of 9.1%, which is roughly in line with the middle of guidance, according to LSEG.
Earnings per share are expected to be between $5.56 and $5.64, and are ahead of the $5.59 that analysts were expecting, according to LSEG.
On a call with analysts, chief financial officer Meghan Frank said the company is planning the business “sensibly” with the a shorter holiday shopping season and the “uncertain macro environment.”
For the full year, Lululemon tightened its revenue guidance and rose by just a hair. It now expects fiscal 2024 revenue to come in between $10.45 billion and $10.49 billion, compared to previous guidance of between $10.38 billion and $10.48 billion. The forecast would exceed the $10.44 billion expected by Wall Street, according to LSEG
Earnings per share are expected to be between $14.08 and $14.16, ahead of the $13.97 that analysts were expecting.
Lululemon has hit a rough patch over the past year. It is still growing, but at a slower pace than before, and the competitive environment has become more intense. Lululemon has always competed with legacy giants like Nike, gaps Athleta and Leviand Beyond Yoga, but newer disruptors such as Vuori and Alo Yoga are also taking share from the Canadian retailer.
The company has turned to China for growth, which so far is driving sales across the entire industry. Comparable companywide sales grew 4% in the quarter, ahead of the 3.2% growth Wall Street was expecting, according to StreetAccount.
Behind that number is a 2% slowdown in comparable sales in the US, but a 25% increase internationally. Total revenue grew 2% in the Americas in the quarter and 33% internationally. However, America is still Lululemon's largest market, and international is still a fraction of their total revenue.
Lululemon has also had a few selfish challenges. It canceled a high-profile product launch earlier this year and lost out on sales in the US when it failed to offer the colors and sizes its core customers wanted.
When the company reported earnings in August, McDonald pointed out that the brand was still strong in the US, but the women's business had slowed because they did not have enough new styles to attract customers.
All of these issues coincided with the departure of Lululemon's Chief Product Officer, Sun Choe, who stepped down in May and joined VF Corp. After her departure, McDonald unveiled a new reporting structure on the product side of the house that ties Lululemon's brand and merchandising teams together under Nikki Neuburger, chief brand and product operations officer. McDonald said the new structure makes the company more efficient and said it is “on track” to ramp up new product releases in time for the spring sales season.
“Our teams have been flexible and have been running into seasonal colours, prints and patterns. I'm sure you've seen a number of examples across our core franchises,” said McDonald. “These efforts have contributed to the linear improvement in innovation within our domain over the last half of the year … we continue to see great potential for growth in the US.”
In a note, GlobalData managing director Neil Saunders said Lululemon's product struggles appear to be behind him.
“Throughout the third quarter the women's range felt fresh and exciting and there was more than enough to capture the attention of customers,” said the retail analyst. “This both improved the conversion rate and helped with volumes basket average. In our view, Lululemon deserves praise for a swift course correction that reinforces that it is a buyer-driven organization.”
Lululemon's struggles also come at a time when consumers are reeling from persistent inflation and an economy that feels worse than it might actually be. more selective than ever and less forgiveness when a brand makes a mistake.
Amid its rough patch, Lululemon has turned to stock buybacks to keep Wall Street happy. It approved a $1 billion increase to its stock buyback program this month. As of Thursday, there was about $1.8 billion left in the program.
Lululemon has also focused on increasing profitability amid uncertain demand. In the third quarter, gross margin grew more than expected, rising 1.5 percentage points to 58.5%, ahead of the 57.5% that analysts had expected, according to StreetAccount.
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