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Lululemon: Solid Growth Appears Here To Stay
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Lululemon (LULU.US) announced its first-quarter results yesterday and raised its full-year forecast. Boosted by strong results, the company's shares soared more than 14%.
Both revenue and profit exceeded expectations. The company’s Q1 revenue was US$2 billion, an increase of 24% from US$1.61 billion in the previous year, which was higher than market expectations of US$1.93 billion; GAAP EPS of $2.28, compared with $1.48 last year and consensus estimates of $1.98. Gross margin, SG&A expense ratio, and inventory were also better than previous guidance
High-growth Greater China market
Lululemon is still in the early stages of international expansion. In 2022, lululemon's international revenue only accounted for 16% of the company's overall revenue. One of the three pillars of the company's Power of Three x2 plan is international expansion. The goal is to expand international market between 2021 and 2026. During the period, the business outside North America will be quadrupled, and the Greater China region will become the second largest market after North America.
Looking at the quarter's performance, growth in international regions was particularly strong, led by a recovery in China. In the first quarter, North American revenue rose 17%, while international revenue rose 60%. Among them, the business in Greater China accelerated significantly, with revenue increasing by 79%. In the last quarter, under the epidemic control, the revenue in China also increased by more than 30% year-on-year, which shows that China has huge consumption potential. In the first quarter, the company opened 7 new stores and completed the renovation of 3 stores. Previously, the management stated that it planned to open 45 to 50 self-operated new stores in 2023 and complete about 25 renovations. Most of the new stores will be in China.
Outside of China, lululemon is also entering other new markets, such as entering the Spanish and Thai markets this quarter, and the Spanish market made a good start in the first quarter.
Gross profit margin increased significantly
Gross profit for the first quarter was $1.15 billion, or 57.5% of revenue, compared to 53.9% of revenue in the same period last year, and gross margin increased by 360 basis points compared to the same period last year, mainly due to the impact of lower air freight costs.
SG&A expenses were approximately $748 million, or 37.4% of revenue, compared to 37.7% of revenue in the year-ago quarter. The main reason is the leverage effect brought by the higher-than-expected revenue, which also reduces some investment.
Customer Behavior Remains Strong
Lululemon mainly targets high-income consumers, who tend to be better able to withstand macroeconomic pressures, but in the current environment, consumer discretionary spending and sales of high-priced goods have also decreased.
And lululemon mentioned in the conference call that "In terms of our guest metrics, they remain very strong. We've seen no change in our cohort behavior in terms of frequency of purchase or engagement. In addition, in quarter one, transactions by existing guests increased 22% and our transactions by new guests increased 28%. And traffic was also strong across both channels with stores up over 30% and e-comm up approximately 30%.”.
Compared with other peers, lululemon still insists on full price sales or smaller discounts, and the discount rate will be basically the same as that of the same period last year. Lulu's core non-seasonal products continue to account for about 45% of the inventory, and this part of the product has no out-of-season products.
Under the sluggish consumption environment, lululemon still achieved considerable revenue growth in this quarter, and consumer behavior has not undergone major changes. The decline in air freight costs has improved the gross profit margin.
China is doing very well, North America continues to grow strongly, and if the business can be successfully replicated internationally, it will be a positive sign for long-term growth. With international expansion, men wear and continued product innovation, there is still a lot of potential for growth .
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duk3 : Yesterday, Yahoofinance reported that, following the firing of two employees specifically for calling the police during a brazen shoplifting incident at a Atlanta location, CEO Calvin McDonald doubled down on the decision, stating "...[W]e put the safety of our team and of our guests front and centre. *It's only merchandise* at the end, they're trained to step back, *let the theft occur*, know that there's technology and cameras and we're working with law enforcement."
Given this statement days ago by the CEO himself, and with a showing that, as corporate policy, Lululemon is uninterested in securing inventory and instead "lets the theft occur," as well as retaliated against employees for attempting to protect "just merchandise," does this affect your current bullish outlook in spite of the positives you describe in this article?
Carter West OP duk3 : Thanks for sharing the info, but I don't think it's a common occurrence, theft won't have a big impact on inventory, and as for brand image damage, I don't think it's a big concern either