Lululemon - inventory backlog meets consumer downgrade

The rationality of consumer downgrading is extinguishing the impulse of brand premium and collection desire, inventory meets the momentum of rational consumption, and lululemon has to succumb. In the early days, almost no promotions were made, but now there are more and more discounted products, and the frequency of offers has increased.

In the latest announcement of the third quarter earnings, revenue rose 28% year-on-year. However, inventory surged 85% from a year ago to $1.742 billion. Gross margin fell 1.3% year-over-year to 55.9%; net profit of $255 million was well below market expectations of $1.8 billion.

After the earnings announcement, the stock price dived 15%, the most significant drop in the past three years.

"Inventories were raised as a reaction to supply chain disruptions from the outbreak while preparing for the upcoming peak sales season."

"The economic downturn following the epidemic, consumers in the North American market were the first to show signs of a decline in purchasing appetite and a downgrading of consumption that is returning to sanity."

With the epidemic's impact, household consumables are beginning to downgrade consumption, and sportswear is also. Practicality and cost-effectiveness become the primary factors when shopping.

Uniqlo, the more economic downturn, the better the business, still maintaining 1.2% revenue growth in the Chinese market. Not only because of cheap but also essential practicality.

Unlike luxury goods, brand premiums and product collection can continue to retain value, and sportswear is led by practicality. Cost-effectiveness is beginning to be of concern to more consumers. Nike and Adidas are still the first choices for the public to try fitness for the first time, and yoga pants at an average price of 300+ are more novice-friendly.

From the footwear product line launched in the past two years to the addition of men's apparel, all are attempts for the second growth line.

From FY2019, the revenue share of men's businesses increased yearly, from 19.9% to 23.7% in FY22, showing a higher growth rate than women's businesses.

Revenues in the mainland market have grown at a three-year CAGR of nearly 70% and continue to increase. The number of stores in China is expected to increase to 220 by fiscal 2026, making it the brand's second-largest market. And the sinking market will become a significant trend for the next store opening.

As an essential engine for growth in the international market, revenue growth has become the top priority for China stores. All offers point to one purpose "to remove inventory and stimulate consumption."

Competition in the Chinese fitness apparel market is nearing a fever pitch. Domestic brands such as MAIA ACTIVE, NEIWAI ACTIVE, and head brand Li Ning compete in the yoga apparel market; overseas brands such as LORNA JANE from Australia and Sweaty Betty from the UK are entering China.