Lululemon Proves Activewear Still in Demand, Even Among Cautious Shoppers

Lululemon is stretching the limits of inflationary times, proving that even cautious consumers are still craving athleticwear.

The Canadian athletic apparel-, accessories- and footwear-maker revealed quarterly earnings Thursday after the market closed, improving on top and bottom lines with strength in all channels.

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Lululemon Unveils Footwear Collection
Lululemon CEO Calvin McDonald in New York earlier this year, during Lululemon’s footwear launch.

“In the third quarter, we continued to deliver strong and balanced results across the business, demonstrating the significant potential for our brand,” Calvin McDonald, Lululemon’s chief executive officer, said in a statement. “Our ongoing momentum is a testament to our innovative products, deep community relationships and the hard work and dedication of our talented teams around the world. We are pleased with our early holiday season performance and look forward to all that’s ahead for Lululemon as we continue to deliver on our ‘Power of Three X2’ growth plan.”

Revenues for the three-month period increased 28 percent to $1.85 billion, up from $1.45 billion a year ago. Net revenues in North America were up 26 percent for the quarter, year-over-year, and 41 percent internationally. McDonald told analysts on Thursday evening’s conference call that revenues in mainland China grew nearly 70 percent during the quarter.

“Despite lockdowns, the [China] market continued to grow,” McDonald said.

Total comparable sales rose 22 percent, while comparable store sales were up 14 percent during the quarter. Direct-to-consumer net revenues — which represented 41 percent of total company revenues — grew 31 percent.

Lululemon hike collection
Lululemon expanded its assortment to include a hike collection earlier this year.

Both the men’s and women’s business grew during the quarter, up 28 percent and 23 percent, respectively, while accessories was up 52 percent, year-over-year. In-store traffic grew 25 percent, year-over-year, while traffic to the e-commerce business rose 50 percent.

Black Friday was the biggest day in our history in terms of our revenues and traffic,” McDonald said on the call. “I am encouraged with the beginning of our holiday season.”

Third quarter ending inventory grew 85 percent to $1.7 billion, compared with $900 million last year. But the CEO told analysts that the company made the decision to stock up on product last year in order to capture growing guest demand.

“Inventory levels were too lean last year,” McDonald explained. “[Now] we are well positioned to be in stock throughout the holidays.”

The company logged more than $255 million during the third quarter, up from nearly $188 million the same time last year.

“We are proud to have delivered another quarter of strong sales and earnings growth, despite an operating environment that remains dynamic,” said Meghan Frank, Lululemon’s chief financial officer. “These results illustrate the strength and differentiation of our omni operating model and position us well to deliver ongoing value for our stakeholders. We look forward to a strong finish to our fiscal year.”

But investors were not satisfied with the retailer’s fourth-quarter guidance. Shares fell nearly 10 percent in after-hours trading as a result.

For the fourth quarter, Lululemon anticipates net sales will be in the range of $2.60 billion to $2.65 billion. Diluted earnings per share are expected in the range of $4.20 to $4.30 for the quarter.

Net revenues for the full year are expected in the range of $7.94 billion to $7.99 billion, with diluted earnings per share in the range of $9.94 to $10.04.

Executives on the conference call acknowledged a challenging macro environment. But Frank added that the firm is expecting tailwinds in the form of reduced freight prices going forward. And despite an increasingly promotional environment, Lululemon anticipates fourth-quarter markdowns in line with 2019 levels.

“Regular price is still selling, driven by the overall uniqueness in the product,” McDonald said.

The retailer ended the quarter with 623 stores. Earlier this year, Lululemon opened stores in Spain and launched on JD.com. Most recently, the retailer opened its first store in Paris.

Lululemon is also the owner of at-home fitness system Mirror, which it purchased in 2020 for $500 million.

Lululemon Mirror
At-home fitness system Mirror is owned by Lululemon.

Last December, the firm said Mirror could be a potential headwind, amid continued supply chain issues and as at-home fitness slowed down. Then at Lululemon’s Investor Day in April, the company said it would no longer separate Mirror revenues from total company revenues during earnings reports.

The company ended the quarter with nearly $353 million in cash and cash equivalents.

Shares of Lululemon, which closed up 0.59 percent to $374.51 apiece Thursday, are down more than 10 percent, year-over-year.

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