Lululemon‘s U.S. growth is continuing to slow, but the athletic apparel retailer is making big gains abroad, leading to a 9% increase in sales year over year.
The yoga pants company on Thursday beat Wall Street’s expectations on the top and bottom lines and said it’s “pleased” with the start to the holiday season. Still, 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 large volume weeks in front of us,” said McDonald. “Given the shorter holiday shopping season, we continue to be thoughtful in our planning for quarter four overall.”
Here’s how Lululemon performed in its fiscal third quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:
- Earnings per share: $2.87 vs. $2.69 expected
- Revenue: $2.40 billion vs. $2.36 billion expected
Shares climbed about 8% in extended trading Thursday.
The company’s reported net income for the three-month period that ended Oct. 27 was $352 million, or $2.87 per share, compared with $249 million, or $1.96 per share, a year earlier
Sales rose to $2.40 billion, up about 9% from $2.20 billion a year earlier.
For the all-important holiday shopping quarter, Lululemon is expecting revenue to be 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 midpoint of the guidance, according to LSEG.
It’s expecting earnings per share to be between $5.56 and $5.64, the high end of which is ahead of the $5.59 analysts had expected, according to LSEG.
On a call with analysts, finance chief Meghan Frank said the company is planning the business “prudently” given the shortened 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 come in between $10.45 billion and $10.49 billion, compared to previous guidance of between $10.38 billion and $10.48 billion. The outlook would top the $10.44 billion that Wall Street had expected, according to LSG
It’s expecting earnings per share to be between $14.08 and $14.16, ahead of the $13.97 that analysts had expected.
Lululemon has hit a rough patch over the last year. It’s still growing, but at a slower pace than it was previously, and the competitive environment has gotten more intense. Lululemon has always competed with legacy giants like Nike, Gap’s Athleta and Levi‘s Beyond Yoga, but newer disrupters such as Vuori and Alo Yoga are also taking share from the Canadian retailer.
The company has turned to China for growth, which so far is lifting sales across the overall business. Company-wide comparable sales grew 4% during the quarter, ahead of the 3.2% growth Wall Street was anticipating, according to StreetAccount.
Behind that number is a 2% slowdown in comparable sales in the U.S., but a 25% increase internationally. Overall revenue grew 2% in the Americas during the quarter and 33% internationally. Still, the Americas remains Lululemon’s largest market, and international is still a fraction of its overall revenue.
Lululemon has also had a few self-inflicted challenges. It fumbled a high-profile product launch earlier this year and missed out on sales in the U.S. when it failed to offer the colors and sizes that its core customers desired.
When the company reported earnings in August, McDonald insisted that the brand remains strong in the U.S., but its women’s business had slowed because it didn’t have enough new styles to entice customers.
All of these issues coincided with the departure of Lululemon’s longtime chief product office Sun Choe, who resigned in May and joined V.F. Corp. In the wake of her departure, McDonald unveiled a new reporting structure on the product side of the house that merges together Lululemon’s brand and merchandising teams under chief brand and product activation officer Nikki Neuburger. McDonald said the new structure makes the company more efficient and said it’s “on track” to increase new product releases in time for the spring selling season.
“Our teams have been agile and have been chasing into seasonal colors, prints and patterns. I’m sure you’ve seen several examples across our key franchises,” said McDonald. “These efforts have contributed to the sequential improvement in newness within our assortment in the back half of the year … we continue to see significant potential for growth in the U.S.”
In a note, GlobalData managing director Neil Saunders said it looks like Lululemon’s product struggles are behind it.
“Across the third quarter the women’s range felt fresh and interesting and there was more than enough to grab the attention of shoppers,” the retail analyst said. “This both improved the conversion rate and helped with average basket sizes. In our view, Lululemon deserves praise for the quick course correction which underlines that it is a merchant-led organization.”
Lululemon’s struggles also came at a time when consumers, reeling from persistent inflation and an economy that feels worse than perhaps it actually is, are choosier than ever and less forgiving when a brand makes a mistake.
Amid its rough patch, Lululemon has turned to stock buybacks to keep Wall Street happy. It approved a $1 billion increase to its stock repurchase program this month. As of Thursday, it had 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 by 1.5 percentage points to 58.5%, ahead of the 57.5% that analysts had expected, according to StreetAccount.
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