Lululemon shares surge after reporting 24% sales growth, raising full-year guidance

Lululemon reported earnings that beat Wall Street’s estimates on the top and bottom lines Thursday and raised its full-year guidance, bolstered by improvements in China and freight costs.

Shares of the company surged more than 12% in extended trading.

Here’s how the retailer did in its fiscal first quarter compared with what Wall Street was anticipating, based on a survey of analysts compiled by Refinitiv:

• Earnings per share: $2.28 vs. $1.98 expected
• Revenue: $2 billion vs. $1.93 billion expected

The company’s reported net income for the three-month period that ended April 30 was $290.4 million, or $2.28 per share, compared with $190 million, or $1.48 per share, a year earlier. 

Sales rose 24% to $2 billion, up from $1.61 billion a year earlier.

China revenue alone grew 79% from the year-ago period, when the country was still reeling from Covid restrictions and roughly one-third of Lululemon’s 71 China stores were closed for a period of time.

“Our Q1 results were strong as guests responded well to our product offering in all our markets across the globe. A meaningful acceleration in our China sales trend, coupled with lower air freight, contributed to our better than planned financial performance,” finance chief Meghan Frank said in a statement. “We are pleased with our momentum heading into the second quarter and for the full year as reflected in our revised outlook for FY23.”

The retailer now expects to see full-year revenue of $9.44 billion to $9.51 billion, up from a previous range of $9.31 billion and $9.41 billion, and beating Wall Street’s projections of $9.37 billion, according to Refinitiv. It expects full-year profit of $11.74 to $11.94 per share, compared with a prior range of $11.50 to $11.72. That also topped analysts’ expectations, which called for $11.61 per share, according to Refinitiv. 

Lululemon is expecting second-quarter sales to be in the range of $2.14 billion to $2.17 billion, representing growth of about 15%. Lululemon expects diluted earnings per share to be in the range of $2.47 to $2.52 for the period. That second-quarter guidance was largely in line with Wall Street expectations, according to Refinitiv.

The apparel retailer, which sells high-end yoga pants, shoes and other athletic wear, saw a 24% year-over-year increase in sales, even as it lapped strong comparisons in the year-ago period, which came during an easier macroeconomic backdrop.

This time last year, Lululemon had just raised its prices, but shoppers were still flocking to its stores and filling up their digital carts. And they weren’t yet feeling the pressure of persistent inflation.

Total comparable sales, which tracks digital revenue and sales at stores open for at least 12 months, were up 14% in the quarter, which fell short of estimates of 15.1%, according to StreetAccount.

While comparable store sales outperformed expectations in the most recent quarter — jumping 13%, compared with StreetAccount estimates of 8.3% growth — direct-to-consumer revenue fell short of projections, increasing 16% from the prior-year period, compared with the 22.3% jump analysts had expected, according to StreetAccount.

While DTC revenue increased compared to last year, it represented 42% of total sales, compared to 45% in the year-ago period.

Gross margins in the quarter increased 3.6 percentage points to 57.5%, driven by a reduction in airfreight expenses. That was above the 56.7% analysts had been expecting, according to StreetAccount.

By category, women’s sales increased 22%, men’s gained 17% and accessories were up 67%.

Inventory, which has been an ongoing issue for Lululemon, was up 24% at $1.58 billion at the end of the quarter and is expected to be up 20% in the next quarter. During an earnings call, company executives insisted its inventories are in line with sales growth and said they’re “comfortable” with its position.

Still, they acknowledged Lululemon has work to do.

“We will still have opportunities … to get our inventory [turnover rates] back to historical levels. We have seen some material improvements in supply chain and lead times but not all the way back to historical positioning,” said Frank during the earnings call. “So, too soon to say when we’ll move back to those levels, but that would be the goal over the longer term.”

The company expects to open 50 net new company-operated stores in the fiscal year. Thirty to 35 of them will be in international markets, with the majority planned for China.

While the company largely caters to higher-income consumers who tend to fare better against macroeconomic pressure, retailers across the industry have cited a pullback in discretionary spending and higher-ticket items. 

During Nordstrom’s earnings call Wednesday evening, executives noted the high-end customer is “pretty resilient,” but they’ve also become more cautious.

Meanwhile, Lululemon said it has seen no changes in its customers’ shopping habits.

“In terms of our guests’ metrics, they’ve remained very strong. We’ve seen no change in our cohort behavior, in terms of frequency of purchase or engagement,” said CEO Calvin McDonald. “In addition, in quarter one, transactions by existing guests increased 22% and our transactions by new guests increased 28%.”

During the current earnings season, some analysts cautioned soft goods retailers, or those that sell items such as clothes and shoes, could see a drop in margins because of increased promotional activity and an overall pullback across the sector. 

The results on that front have been mixed so far.

Many retailers have benefited from supply chain tail winds, such as reduced freight costs, that have boosted their margins. But for some, a lot of those savings evaporated because of increased promotions and upticks in shrink, among other headwinds.

That rang true for Foot Locker, but others in the category, including Gap and Urban Outfitters, were able to hold the line on promotions and saw the benefits to their margins. 

Last month, CNBC reported Lululemon is looking to sell its at-home fitness business Mirror and has approached competitor Hydrow as a potential buyer.

The company announced it would acquire Mirror for $500 million at the height of the at-home fitness bonanza in June 2020 in a bet that people would continue to exercise at home, even after Covid pandemic restrictions ended and gyms reopened. 

The segment has since rebranded as Lululemon Studio but it has been weighing on its balance sheet. 

During its previous fiscal quarter, the company said it took $443 million in impairment charges related to Mirror and told investors hardware sales have come in below expectations. 

Lululemon acknowledged the at-home fitness market has been under pressure.

Similar to Peloton, Lululemon has begun pivoting the segment away from being solely hardware-focused.

Recently, the company launched a new digital app for Lululemon Studio, which costs the same as Peloton’s starting membership at $12.99 a month and gives customers access to its fitness classes without the need to buy its hardware.