LululemonAmazon's US growth continues to slow, but the sports apparel retailer is making big gains overseas, generating a 9% increase in sales year-over-year.
The yoga pants company on Thursday beat Wall Street's top and bottom line forecasts and said it was “thrilled” 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 high-volume weeks ahead of us,” McDonald said. “Given the shorter holiday shopping season, we continue to reflect on our planning for the fourth quarter overall.”
Here's how Lululemon performed in its fiscal third quarter compared to what Wall Street expected, based on a survey of analysts conducted by LSEG:
Earnings per share: $2.87 vs. $2.69 expected Revenue: $2.40 billion vs. $2.36 billion expected
Shares rose about 8% in extended trading on Thursday.
The company's reported net income for the three-month period ending October 27 was $352 million, or $2.87 per share, compared to $249 million, or $1.96 per share, in the previous year.
Sales rose to $2.40 billion, up about 9% from $2.20 billion the previous year.
For the all-important holiday shopping quarter, Lululemon expects revenue to range 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 range between $5.56 and $5.64, which is the high end of $5.59 expected by analysts, according to LSEG.
On a call with analysts, Chief Financial Officer Megan Frank said the company is planning the business “prudently” given the short holiday shopping season and the “uncertain macro environment.”
For the full year, Lululemon tightened its revenue guidance and raised it by just a hair. It now expects fiscal 2024 revenue to be between $10.45 billion and $10.49 billion, compared to previous guidance of $10.38 billion to $10.48 billion. The forecast would exceed the $10.44 billion Wall Street expected, according to LSEG
It expects earnings per share to range between $14.08 and $14.16, ahead of the $13.97 that analysts had expected.
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, gap'Athlete and Levi's Beyond Yoga, but newer companies like Vuori and Alo Yoga are also taking share of the Canadian retailer.
The company has turned to China for growth, which has so far lifted sales across the overall business. Companywide comparable sales grew 4% during the quarter, ahead of the 3.2% growth Wall Street expected, according to StreetAccount.
Behind this figure lies a 2% slowdown in comparable sales in the US, but a 25% increase internationally. Total revenues grew 2% in the Americas during the quarter and 33% internationally. However, the Americas remain Lululemon's largest market, and the international market still represents a small portion of its total revenue.
Lululemon also faced some self-imposed challenges. It fumbled a high-profile product launch earlier this year and lost sales in the US when it failed to offer the colors and sizes desired by its core customers.
When the company reported earnings in August, McDonald insisted that the brand was still strong in the U.S., but its women's business had slowed because it didn't have enough new styles to attract customers.
All of these issues coincided with the departure of Sun Choi, Lululemon's chief product officer, who resigned in May and joined Lululemon. VF Company. In the wake of her departure, McDonald's unveiled a new reporting structure on the product side of the home that brings together Lululemon's brand and merchandising teams under the leadership of Nikki Newberger, CEO of brand and product activation. McDonald said the new structure makes the company more efficient, and she said it is “on track” to increase new product releases in time for the spring sales season.
“Our teams were flexible and sought out seasonal colours, prints and patterns. I'm sure you've seen many examples across our flagship franchises,” McDonald said. “These efforts have contributed to a sequential improvement in freshness within our portfolio in the latter half of the year…and we continue to see significant potential for growth in the US.”
In a note, Neil Saunders, managing director of GlobalData, said Lululemon's product struggles appear to be behind this.
“During the third quarter, the women's collection looked fresh and interesting, and there was enough to catch shoppers' attention,” the retail analyst said. “This has improved the conversion rate and helped with average basket sizes. In our view, Lululemon deserves credit for the quick course correction that confirms it is a merchant-driven organization.”
Lululemon's struggles have also come at a time when consumers, struggling with persistent inflation and an economy that looks worse than it actually is, are more choosy than ever and less forgiving when a brand makes a mistake.
In the midst of its difficult situation, Lululemon has turned to stock buybacks to keep Wall Street happy. It approved a $1 billion increase in its stock buyback program this month. As of Thursday, there was approximately $1.8 billion remaining in the program.
Lululemon has also focused on boosting profitability amid uncertain demand. During the third quarter, gross margin grew more than expected, increasing 1.5 percentage points to 58.5%, ahead of the 57.5% that analysts had expected, according to StreetAccount.
