Lululemon Q1’24 earnings

Lululemon announced its Q1’24 results yesterday. This is my biggest holding in the social media account, so it’s quite important for that account. After listening to the earnings call twice, and reading the transcript after that, I made a few notes on the important parts, I will start with the business metrics, then what else I heard, ending with my opinion of it all. Let’s dive straight into it!

- Starting with the business metrics

EPS came in at $2.54, on revenues of $2.208 billion, this beat estimates of $2.20 on revenues of $2.199 billion.

On a constant currency basis, growth was 10%, to 11%. When we look at the geographics of that growth, we can see that Mainland China grew 52%, rest of the world grew 30%, and the Americas grew 4%, which can be broken down to 12% growth in Canada, and 2% in the US. This is all constant currency, on a reported basis, growth was 45% for Mainland China, with comparable sales increasing 33%. Rest of world segment grew 27% on a reported basis, comparable sales increased 26%.

Square footage increased by 14% versus last year. Digital revenue increased 8% to $906 million, or 41% of total revenues. 

The women’s business saw 10%, as men’s business grew 15% and accessories grew 2%, which was deemed impressive given the 67% growth it saw last year.

Store sales were up 12%, while digital sales were up 8%. The digital channel contributed 906 million of revenues, or 41% of the overall revenue.

Gross margins improved by 20bps in total, this was driven by the following:

• 120bps increase in overall product margin, driven primarily by lower costs, lower airfreight costs, and lower inventory provisions. Offset by 50bps increase in markdowns

• 70bps decrease due to deleverage on fixed costs

• 30bps decrease deleveraging on foreign exchange

The buy-out of the Mexican franchise is done for 160 million in cash, and expected to close in the next couple of weeks. The company expected the acquisition to have an immaterial impact on the financial results for fiscal year 2024. The reason behind the acquisition? As Megan Frank, the CFO, says it “Our partner has built an incredible foundation for our brand in Mexico, and our acquisition will allow us to more efficiently continue to expand, grow our community, and enhance the guest experience”. 

SG&A expenses were 38.1% of revenue, compared to 37.4% last year. The 70bps change was lower than the 130bps to 140bps change from guidance. “Driven mostly by timing, slightly better topline, prudent management of expenses”.

McDonald sees international business, which now represents 21% of the business, grow to 50%.

- So what are other things that stand out?

Calvin McDonald, the CEO, seemed very honest about missed opportunities within the US women’s and bags businesses where they could have optimized more. The company was out of stock on some items, like smaller sizes. They also admitted to miss color, because where they had it, it performed well. Finally, they saw strong demand for the newer style of bags, like the two-toned tote, but these weren’t bought with enough depth to fully capture demand.

The company also did a bunch of stock buy-backs. During Q1, the company bought back about $300 million worth of stock, with an additional $230 so far during Q2. This means a total of $530 million YTD. An additional $1 billion was cleared for stock buy-backs by the board of directors, and the company now has $1.7 billion in total for its stock buy-back plan.

Regarding the exit of the Chief Product Officer, McDonald had been in regular conversations with Choe, so he knew about her personal, and career goals. He followed this up by saying “We regularly update our succession plans, which allowed us to seamlessly step into our new planned leadership structure.”

The new EPS guide doesn’t include any future stock buy-backs, but does include the buybacks made YTD, it also includes a renewed outlook on interest income. The raise in guidance is quite a decent one, from previously seeing $14 to $14.20, to now seeing $14.27 to $14.47. Taking the low end of the new guidance, the stock traded at a 21.6x multiple to it, at market close before reporting earnings ($308.27), taken the high end of the guide, this number becomes 21.3x.

Lululemon reported to have seen gains in market share in both the U.S. apparel industry, as well as the U.S. activewear industry. The company saw outsized market share gains in the men’s market, but women’s market share didn’t really change due to the missed opportunities. Traffic was positive in the US, but they lagged a bit in conversion due to the missed opportunities.

- So what’s my opinion on the earnings?

Overall I think they are very good. I had a few question marks going into the earnings which have been perfectly answered but I can’t help to look at the revenue guide. I also said it in the Morning Market Feed this morning, companies that miss guidance have often sold down. I wrote this before pre-market opened, as the stock was up 10%. As the market opened, the stock initially sold down to the point where it was up just 2.5%. The good thing about the guide was the Full Year EPS guide. Which was now raised above expectations.

Let’s look at one more thing I found really smart, which was the aggressive buy-backs. The stock is trading historically cheap. Not just cheap, but incredibly cheap. Buying back stock as aggressively as they do not only radiates confidence, but it’s also the best place to do it as it takes the most amount of shares out of the markets, thus increasing your % stake in the company.

Something I did not like was the fact that they missed opportunities due to the lack of colors. I think its great how honest they are about it and take responsibility, but lacking color for the leggings is something that was preventable. The shortage on a new product like the two-tone tote is more of a luxury, it’s hard to predict how well such a product will do, so I won’t be too critical on that part.

As I already mentioned, I really liked how open, clear, and transparent McDonald and Frank were. The stock absolutely needed it but that doesn’t make it a given that the executives take the responsibility and explain what’s happening like they did. Before the earnings came out, I also wrote a “ Hot Takes” in which I explained which question marks around the business I wanted answered, but I will go deeper into this in my upcoming Youtube Video.

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