🔼 Has Lululemon Made An Inflation Lemonade?

CVS to buy home health giant Signify Health


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🍋 Lululemon: An Inflation Lemonade?

It is rare to hear companies increasing their full-year outlook in the US amidst the twin woes of inflation and recession. Lululemon Athletica (LULU) provided one such instance last week where it not only beat estimates but sounded optimistic for the rest of the year. Has it set itself on course to achieve its ambitious future targets?

Puncturing Inflation 

Inflation + Recession worries + Cut in consumer spending = Tough times for retailers.

Macy’s and Nordstrom, both high-end apparel retailers, cut their respective full-year forecasts, citing a deteriorating spending outlook along with an inventory glut and slowing demand.

Known traditionally for women’s yoga pants, Lululemon is known for starting the leggings-everywhere athleisure trend. As part of its “Power of Three” growth strategy unveiled in 2019, the company planned to double its men’s segment revenue by 2023. The move is also part of its aim to double annual sales to $12.5B by 2026.

Today, Lululemon’s men’s segment contributes to a quarter of its overall topline. It is known for two pant styles that are immensely popular among men – the ABC pant launched in 2014 and the Commission pant introduced in 2017. The company targets the men’s segment through NBA player Jordan Clarkson, their brand ambassador.

Another market Lululemon is doubling down on is second-hand clothing, which may be worth $43B this year. Research shows that 62% of Gen Z and millennials would look for second-hand items before newer ones. It tested its resale program called “Like New” in Texas and California before a nationwide rollout on April 22 this year, which happened to be Earth Day.

Lululemon has a deal with a company named Trove Recommerce which sorts out good enough garments for resale. The cleaning technique, originally developed to clean nuclear bomb parts, is provided by Tersus Solutions.

An observation that “farther the garment is away from the skin, greater is the chance for it to sell” is evident from the changes in discount levels. A new and used gear seller sells a tent at a 30% discount, but the same for pre-owned thermal underwear increases to 60%.

Firing All Cylinders

Have any of these problems affected Lululemon? No. The company reported strong quarterly results and raised its full-year outlook.

Key Highlights From Q2:

  • Revenue: $1.87B Vs $1.77B expected
  • Earnings Per Share: $2.20 Vs. $1.87 expected
  • Same-Store Sales: 23% Vs 17.6% expected

The company’s customer base falls in the high-income bracket, which has remained unaffected by high inflation. As a result, revenue increased 29% year-on-year, which CEO Calvin McDonald attributed to a broad-based performance across its channels, regions, and merchandise categories.

Lululemon’s management also attributed the growth to strong traffic in brick-and-mortar and online channels. Store traffic increased 30% in Q2, while e-commerce grew 40%.

Speaking of e-commerce, the business witnessed 32% year-on-year growth and made up ~42% of the overall revenue. Analysts termed this growth “even more admirable,” looking at the current state of affairs at various e-commerce companies. None of this increase came from any promotional programs or product markdowns.

The new guest acquisition remains strong, with transactions from first-time customers increasing by 20% in Q2. Existing customer transactions increased in the high-teens. Price hikes undertaken have not met with any resistance so far.

As part of its 2026 goals, Lululemon is also expanding its international footprint, opening its first store in Spain this July. With this, the company now operates across eight countries in Europe. The management believes the goals are much more “attainable” with overseas growth.

Inventory during the quarter increased 85% to $1.5B as it remained “under-inventoried” during the base quarter due to supply-chain issues. However, the company is confident that higher inventory will help support growth during the crucial holiday season.

The retailer also increased its full-year outlook, the second instance in as many quarters.

Guidance for full-year 2022:

  • Revenue: $7.86B – $7.94B from $7.61B – $7.71B earlier
  • Earnings Per Share: $9.75-$9.90 from $9.35-$9.50 earlier

Lululemon touted some early success with its newly launched initiatives like shoes. At the same time, the men’s business grew 27% year-on-year, with growth seen in all countries where stores are operational.

Analysts believe that calling Lululemon’s performance “stand-out” would be an understatement. They maintain that it remains the best-in-class among peers with several growth levers.

Shares are down ~20% this year, even after the blowout results and a beefed-up outlook. Fitness enthusiasts binge on their products while inflationary pressures remain at arm’s length. The economy has thrown multiple lemons at Lululemon in various forms, but it has made lemonade of all of those, at least for the time being.

Market Reaction
LULU ended at $314.17, up 6.70%.

Company Snapshot 📈

LULU $314.17 +19.72 (+6.70%)

Analyst Ratings (32 Analysts) BUY 63%  HOLD 31%  SELL 06%


Newsworthy 📰

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  • Mega Event: Apple’s priciest iPhones take center stage as industry smartphone sales decline (AAPL -1.35%)

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  • 7:15 PM IST: S&P US Services PMI

Today’s Fun Fact

More than 50% of fast fashion clothes will be discarded within one year of purchase thanks to fast-moving trends.

 


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