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Home » Lululemon Beats Wall Street Expectations While Navigating Retail Headwinds

Lululemon Beats Wall Street Expectations While Navigating Retail Headwinds

by News Desk

Lululemon’s winning streak continues both on the court and on Wall Street. 

Run and train categories continue to gain momentum at Lululemon.
Courtesy Photo

The Vancouver, B.C.-based athletic apparel, accessories and retailer revealed earnings after the market closed Thursday, improving on top and bottom lines and updating its guidance. Company shares rose nearly 4 percent in after-hours trading as a result. 

“In the first quarter of 2022, continued momentum in the business enabled us to achieve a strong start to the year,” Calvin McDonald, Lululemon’s chief executive officer, said in a statement. “These results provide a solid foundation as we begin our next five-year journey and deliver against our new ‘Power of Three ×2’ growth plan. I want to thank our teams around the world for remaining agile and continuing to execute at a high level to achieve our goals, while successfully navigating the challenges within the macro environment. We look forward to all that lies ahead for Lululemon as we continue to grow the brand.”

The Canadian company landed in New York in April to unveil its new five-year growth plan, anticipating $12.5 billion in revenues by 2026, after achieving its previous goals two years ahead of schedule.  

In the last three months, Lululemon’s total revenues increased 32 percent to $1.6 billion, up from $1.2 billion a year ago. Comparable sales rose 28 percent during the first quarter, year-over-year, while comparable store sales were up 24 percent during the same period. Direct-to-consumer net revenues — which represent 45 percent of the company’s total revenues — grew 32 percent. Traffic in both stores and e-commerce were up 40 percent for the quarter, year-over-year. 

The firm logged profits of about $190 million as a result, up from roughly $145 million a year ago. 

“Lululemon continues to deliver results that sets us apart from other retailers,” McDonald said on Thursday evening’s conference call with analysts. “We’re in early innings of growth and we continue to experience growth across all channels. And Q1 was no different.”

Lululemon is now anticipating current-quarter net revenues in the range of $1.75 billion to $1.77 billion, representing a three-year compound annual growth rate of roughly 26 percent. Adjusted diluted earnings per share are expected to be in the range of $1.82 to $1.87 apiece.

For the full fiscal 2022 year, the company is anticipating net revenues in the range of $7.6 billion to $7.7 billion, representing a three-year compound annual growth rate of 24 percent to 25 percent, with adjusted diluted earnings per share in the range of $9.35 to $9.50 each. 

“Our teams continue to deliver strong financial performance while navigating the ongoing impacts of COVID-19, supply chain disruptions and inflationary pressures,” said Meghan Frank, the retailer’s chief financial officer. “While we are not immune to these challenges, our omni-operating model, balanced growth strategy and unique approach toward innovation enable the positive results we are reporting today and anticipate for the full year.”

McDonald acknowledged macro supply chain headwinds and lockdowns in China on the call. In terms of the latter, the CEO said roughly a third of Lululemon’s 71 stores in China were closed during the first quarter and at least part of the second quarter. Still, the region generated double-digit revenue growth during the most recent quarter. 

“We remain excited about our business in China and we view these headwinds as short-term in nature,” McDonald said on the call. 

Additional headwinds include macro supply chain issues and inflationary pressures, which have impacted raw materials, labor costs and air freight prices. McDonald said some consumer price increases will help offset price increases the company is facing. 

“But I remain cautious about raising prices in this period of uncertainty,” he said.  

In addition, first-quarter inventories rose 74 percent to $1.3 billion, compared with $700 million at the end of last year’s first quarter. Frank said on the call that the company “left profit on the table” by being under-inventoried last year. 

On Thursday’s call, Frank said the company currently feels well-positioned on inventory levels. “If anything, there are pockets of inventory where we wish we had more,” she said. 

Zachary Warring, an equity analyst at CFRA Research, added in a note that the heightened inventory levels aren’t a concern. 

“Unlike other apparel brands [Lululemon] consistently grows into its inventory and has had no issues selling inventory at full price,” he wrote. “[Lululemon] continues to execute in dynamic times and we expect their margins will hold up better than peers and more in line with luxury goods as inflation surges and consumer sentiment drops.”

His firm maintained its “buy” opinion on the company’s stock, reaffirming its 12-year price target of $380.

Meanwhile, the CEO pointed out a number of tailwinds that have positively impacted the company, such as consumers’ desire for versatile apparel; healthy lifestyle trends, and the brand’s array of technical apparel. 

“I’m really proud of how the product is resonating; the guest response to core and new merchandise remains strong,” said McDonald, adding that hike and “throw-back” collections are coming in the current quarter. 

“There’s some use of our products around the house,” he said. “But our gear is designed for activity-based use. The outdoor, sweat lifestyle. That continues now as strong as it was during the pandemic. When you feel your best, you perform your best.”

Lululemon launched tennis apparel in the most recent quarter.
Courtesy Photo

In the most recent quarter, Lululemon category expansions include footwear, as well as golf and tennis apparel. Lululemon is also the official outfitter of Team Canada (a role it will retain through 2028). Other product and category expansions include last year’s Like New resale program, mushroom bags and Mirror’s assortment of accessories, such as dumbbells and ankle weights. (Lululemon purchased the at-home fitness system in June 2020 for $500 million.) 

The retailer ended the quarter with 579 stores and $649 million in cash and cash equivalents. Shares of Lululemon, which closed up 4.35 percent to $302.58, are down 4.65 percent, year-over-year. 

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