lululemon Apple Inc. cut its forecast and posted its first revenue decline in more than two years on Thursday after it missed a highly anticipated product launch and growth slowed in the Americas.
The company now expects full-year net revenue to be between $10.38 billion and $10.48 billion, down from its previous range of $10.7 billion to $10.8 billion. Lululemon expects earnings per share to be between $13.95 and $14.15, down from its previous guidance of $14.27 to $14.47.
Here's how the company performed in the fiscal second quarter compared to what Wall Street was expecting, based on a poll of analysts conducted by LSEG, formerly known as Refinitiv:
Earnings per share: $3.15 vs. $2.93 expectedRevenue: $2.37 billion vs. $2.41 billion expected
Lululemon shares rose more than 2% in extended trading after initially falling.
The company reported net income for the three-month period ended July 28 of $393 million, or $3.15 per share, compared with $342 million, or $2.68 per share, a year earlier.
Sales rose to $2.37 billion, up about 7% from $2.21 billion a year earlier. Beyond total sales, Lululemon also missed expectations for comparable sales, which grew 2%, well below estimates of 5.9%, according to StreetAccount. Comparable sales in the Americas fell 3%.
The trend doesn’t look set to improve in the current quarter. Lululemon said it expects sales growth of 6% to 7%, below the 9.2% growth analysts had expected, according to LSEG.
However, Lululemon’s earnings forecast is roughly in line with what Wall Street had expected. The company said it expects third-quarter earnings per share to be between $2.68 and $2.73, compared with estimates of $2.70, according to LSEG.
During the quarter, Lululemon pulled its Breezethrough leggings, which launched in early July, after receiving a wave of complaints about the product's poor fit.
On a conference call with analysts, CEO Calvin McDonald discussed the Breezethrough launch, saying it was an opportunity for the company to “test and learn.” He added that Lululemon purchased a small amount of the product for the launch.
“While guests were enthusiastic about the fabric, the design did not meet their expectations. Listening to our guests is a key component of who we are and how we grow our brand, and we made the right move by discontinuing sales and looking to reintroduce the fabric in the future,” said McDonald. “This decision had a minimal impact on our performance this quarter.”
The failed launch came after the company faced other issues of its own making with its product lineup, including a lack of colors and sizes that its core customers wanted, which impacted sales in the U.S. During the quarter, sales grew just 1% in the Americas, the company’s largest region.
On the call with analysts, McDonald acknowledged that Lululemon’s women’s business has slowed in the U.S. He said the company has determined that the “most significant factor” impacting the segment is a lack of new styles, which has hurt bottoms sales and the company’s online business.
“We did well, but we didn't have enough to inspire her to buy,” he said.
McDonald insisted that the Lululemon brand “remains strong in the U.S. market” and said its men's business continues to grow.
“Guests are searching for our products, coming into our stores and visiting our e-commerce sites,” McDonald added.
Lululemon’s product challenges come on the heels of the departure of its longtime product chief, Sun Choi, who resigned in May to pursue another opportunity. At the time, the decision weighed on Lululemon’s stock because of concerns that Choi’s leadership could hurt the company’s ability to innovate and continue to win customers’ trust with new, trendy apparel.
Lululemon had a succession plan in place at the time of Choi's departure, McDonald said, adding that the company's global creative director, Jonathan Cheung, will report directly to McDonald and oversee product design and innovation.
The company also named Nikki Neuberger as its new president of brand and product activation, overseeing marketing, footwear and product operations. On Thursday, McDonald said he and Neuberger were “thrilled” with the new structure, which puts design and marketing on “an equal footing” and “restores the healthy balance that should exist within a product organization.”
“The teams are working well together and are already at work,” McDonald added.
Like other retailers seeing slowing demand, Lululemon appears to be focusing on what it has control over: operations and efficiency. While the sales picture for the quarter was bleaker than expected, Lululemon’s earnings came in better than expected.
Gross profit rose 9% to $1.4 billion, while gross margin rose 0.8 percentage points to 59.6% — better than the 57.7% analysts had expected, according to StreetAccount. Operating margin and operating income also rose.
Lululemon's sales rose 29% in international markets as the company looks to China for growth.
