Q2 2023 Earnings Report for Lululemon (LULU)

Lululemon has announced an increase in its full-year guidance following an impressive 18% growth in sales and profit for its second fiscal quarter. The surge in revenue was mainly attributed to a 61% spike in sales in China.

The athletic apparel retailer now projects sales to range between $9.51 billion and $9.57 billion for the fiscal year, surpassing the previous estimate of $9.44 billion to $9.51 billion.

Lululemon anticipates its profits for the year to be between $12.02 and $12.17 per share, up from the initial forecast of $11.74 to $11.94.

For the current quarter, the company predicts earnings per share of $2.23 to $2.28 and sales of $2.17 billion to $2.19 billion, aligning with analysts’ expectations according to Refinitiv.

Here’s a comparison of Lululemon’s performance in its second fiscal quarter with the projections of Wall Street analysts based on a survey conducted by Refinitiv:

• Earnings per share: $2.68 vs. $2.54 expected
• Revenue: $2.21 billion vs. $2.17 billion expected

The company reported a net income of $341.6 million, or $2.68 per share, for the three-month period ending on July 30. This marked a significant increase from the $289.5 million, or $2.26 per share, recorded during the same period the previous year. Sales also rose by approximately 18% to $2.21 billion compared to $1.87 billion in the previous year.

The impressive growth in both revenue and profit can be attributed to the strong performance of Lululemon in international markets. Sales outside of North America saw a remarkable 52% increase, primarily driven by a 61% surge in China. This growth surpassed the 30% growth rate seen in the same quarter of the previous year, despite the slowdown in China’s economy.

Lululemon’s finance chief Meghan Frank commented on the stability of the Chinese market during the quarter and described the sales growth as “strong” and “healthy,” despite the modest 2.5% year-over-year increase in retail sales in China as of July.

CEO Calvin McDonald expressed satisfaction with the strong performance of both e-commerce and in-store sales in China. The company currently operates 107 stores in the country and plans to open the majority of its 35 new stores internationally in the region.

Sales in North America also experienced growth, with an 11% increase. However, same-store sales fell slightly short of expectations, with a growth rate of 11% in the quarter compared to the estimated 12.1% according to StreetAccount.

Lululemon is pursuing an ambitious growth plan known as the “Power of Three x2” strategy, aiming to double its sales to $12.5 billion by 2026 compared to its 2021 revenue of $6.25 billion. To achieve this, the company is expanding its physical retail presence and focusing on increasing revenue from its men’s category and direct-to-consumer channels.

The men’s category saw a solid 15% growth during the quarter, and Lululemon opened 10 new stores, including its first location in Thailand. By the end of the quarter, the company had a global total of 672 stores.

The company has also been actively addressing its inventory surplus, reducing year-over-year inventory levels. In the second quarter, inventories increased by 14% to $1.7 billion, compared to $1.5 billion in the same quarter of the previous year. The strong sales performance, along with lower air freight costs, contributed to the movement of inventories, according to Frank.

While turnover rates are still slightly below historical levels, the company is confident in its inventory management and currency position, as stated by Frank.

Direct-to-consumer revenue experienced a 15% increase, although it accounted for a slightly smaller proportion of Lululemon’s overall sales in the quarter. Direct-to-consumer sales represented 40% of the company’s total sales, compared to 42% in the same period of the previous year.

Lululemon’s gross margin aligned closely with expectations, reaching 58.8% compared to the anticipated 58.5% according to StreetAccount.

For more detailed information, please refer to the full earnings release here.