Lululemon’s International Growth Fuels Q3 Beat Despite US Slowdown
Athletic apparel giant Lululemon reported strong third-quarter earnings, exceeding Wall Street expectations despite a slowing growth rate in its core US market. The company’s robust international expansion, particularly in China, compensated for the domestic slowdown, resulting in a 9% year-over-year sales increase and a significant boost in share price. While challenges remain in the US market, Lululemon’s strategic focus on international growth and improved profitability paints a picture of resilience and future potential.
Key Takeaways: Lululemon’s Q3 Performance
- Exceeded Expectations: Lululemon surpassed analysts’ forecasts for both earnings per share (EPS) and revenue in Q3.
- International Growth Engine: Significant sales gains in international markets, particularly a 25% increase in comparable sales growth, offset slowing US growth.
- Holiday Season Optimism: The company expressed confidence in its holiday sales projections, forecasting 8% to 10% revenue growth.
- US Market Slowdown: While overall sales grew, the US market experienced a 2% slowdown in comparable sales, highlighting increased competition and challenges in meeting consumer demands.
- Strategic Initiatives: Lululemon is employing strategies such as stock buybacks and a focus on profitability to address the US slowdown and maintain investor confidence.
Q3 Financial Highlights: A Mixed Bag
Lululemon’s fiscal third quarter, ended October 27th, showcased a fascinating juxtaposition of strengths and weaknesses. The company reported net income of $352 million ($2.87 per share), a notable increase compared to $249 million ($1.96 per share) in the same period last year. Revenue soared to $2.40 billion, representing a 9% jump from $2.20 billion the previous year. These figures handily beat analyst projections of $2.69 EPS and $2.36 billion in revenue, sending the stock price up approximately 8% in after-hours trading.
Breaking Down the Numbers
A closer examination reveals a more nuanced picture. While overall revenue growth was impressive, the source of that growth is critical. US comparable sales increased by only 2%, a significant deceleration compared to previous growth rates. This slower growth reflects intensified competition from established players like Nike and Gap’s Athleta, as well as emerging brands such as Vuori and Alo Yoga. These competitors are vying for a share of the increasingly competitive athletic apparel market.
However, Lululemon’s international sales growth of 25% more than offset the US deceleration. This highlights the efficacy of the company’s international expansion strategy, particularly its success in China. While the Americas remain Lululemon’s largest market, the 33% international revenue growth demonstrates the potential for future gains in these regions. This strategic diversification provides a crucial buffer against market fluctuations in the US.
Challenges and Strategic Responses
Lululemon’s success isn’t without its challenges. The company has faced several hurdles in the past year. One significant setback involved a high-profile product launch that failed to meet expectations. This misstep, coupled with shortcomings in offering the desired colors and sizes for its key customer demographic in the US, directly impacted sales. CEO Calvin McDonald acknowledged these issues, emphasizing that the brand’s fundamental strength remained but that the women’s business in the US had suffered from a lack of new styles.
Addressing the Challenges
The departure of Lululemon’s longtime chief product officer, Sun Choe, in May further complicated matters. Choe’s move to V.F. Corp. left a void in leadership at a critical moment. This personnel change, combined with the company’s missteps in product offerings, coincided with a period of heightened consumer sensitivity to pricing and brand reliability. Consumers, facing persistent inflationary pressures, are exhibiting increased selectivity and less tolerance for brand errors.
In response to these challenges, Lululemon has implemented several strategic initiatives. One notable strategy is the $1 billion increase to its stock repurchase program, demonstrating a commitment to bolstering investor confidence. The remaining $1.8 billion in the program underscores the company’s confidence in its long-term prospects, even amidst near-term headwinds.
Another key strategic move is a focus on improving profitability. The company exceeded analyst expectations in gross margin, achieving 58.5% compared to the anticipated 57.5%. This demonstrates Lululemon’s ability to manage costs effectively whilst maintaining premium pricing, a critical element in navigating market volatility and retaining a favorable profit margin.
Looking Ahead: Holiday Season and Beyond
Lululemon’s outlook for the critical holiday shopping quarter remains positive. The company projects revenue between $3.48 billion and $3.51 billion, indicating growth of 8% to 10% year-over-year. This projection is largely in line with analysts’ estimates of $3.50 billion, suggesting confidence in meeting, and even potentially exceeding, market expectations. Projected earnings per share are estimated between $5.56 and $5.64, with the high end surpassing analyst forecasts.
Full Year Guidance
For the full fiscal year 2024, Lululemon has slightly revised its revenue guidance upwards. The company now anticipates revenue between $10.45 billion and $10.49 billion, compared to its previous projection of $10.38 billion to $10.48 billion. This updated forecast also surpasses analyst expectations of $10.44 billion. Similarly, the projected EPS of $14.08 to $14.16 exceeds the analyst consensus of $13.97.
In conclusion, while Lululemon faces challenges in its US market, its robust international growth, strategic cost management, and proactive investor relations activities showcase the company’s resilience. The strong holiday season projections and upgraded full-year guidance further reinforce investor confidence and suggest a path towards sustained growth, albeit with a greater emphasis on international markets for the foreseeable future.
