Lululemon (LULU) Q3 2024 Earnings

LululemonU.S. growth continues to slow, but the sportswear retailer is making big gains overseas, leading to a 9% year-over-year increase in sales.

The yoga pants company beat Wall Street’s expectations for sales and profit on Thursday and said they were “happy” with the start of the holiday season. Still, CEO Calvin McDonald struck a cautious tone in a call with analysts when discussing the company’s fourth-quarter outlook.

“While we are pleased with the start of the holiday season, we still have weeks of high volume ahead of us,” McDonald said. “Given the shorter holiday shopping season, we continue to remain diligent in our planning for the fourth quarter overall.”

Here’s Lululemon’s fiscal third-quarter performance compared to Wall Street’s expectations, based on an analyst survey from LSEG:

• Earnings per share: $2.87 versus expected $2.69
• Revenue: $2.40 billion versus expected $2.36 billion

Shares rose about 8% in extended trading Thursday.

The company’s reported net income for the three-month period ended Oct. 27 was $352 million, or $2.87 per share, compared with $249 million, or $1.96 per share, a year earlier

Revenue rose to $2.40 billion, up about 9% from $2.20 billion a year ago.

For the key holiday shopping quarter, Lululemon expects revenue between $3.48 billion and $3.51 billion, representing year-over-year growth of 8% to 10%. According to LSEG, analysts expected revenue of $3.50 billion, or growth of 9.1%, about midway through forecast.

According to LSEG, earnings per share are expected to be between $5.56 and $5.64, the high end above the $5.59 expected by analysts.

In a call with analysts, Chief Financial Officer Meghan Frank said the company was planning the business “prudently” given the shortened holiday shopping season and the “uncertain macroeconomic environment.”

Lululemon has tightened its sales forecast for the full year and only raised it by a hair. Revenue for fiscal 2024 is now expected to be between $10.45 billion and $10.49 billion, compared to the previous forecast of $10.38 billion to $10.48 billion. According to LSEG, the outlook would exceed Wall Street’s $10.44 billion

It expects earnings per share to be between $14.08 and $14.16, above the $13.97 expected by analysts.

Lululemon has had a rough patch over the past year. It is still growing, although more slowly than before, and the competitive environment has become more intense. Lululemon has always competed with old giants like Nike, Gap’s Athleta and Leviis Beyond Yoga, but newer disruptors like Vuori and Alo Yoga are also taking shares of the Canadian retailer.

The company has turned to China for growth, which has so far increased sales across the company. According to StreetAccount, companywide comparable sales rose 4% in the quarter, beating Wall Street’s expected 3.2% growth.

This number represents a 2% decline in comparable sales in the U.S., but a 25% increase internationally. Total sales increased 2% in the Americas and 33% internationally for the quarter. Still, America remains Lululemon’s largest market, and the international market still accounts for a fraction of total sales.

Lululemon has also had some self-inflicted challenges. Earlier this year, the company failed to pull off a high-profile product launch and missed out on sales in the U.S. because it didn’t offer the colors and sizes that its key customers wanted.

When the company announced its earnings in August, McDonald insisted that the brand remained strong in the U.S. but that its women’s business had declined because there weren’t enough new styles to attract customers.

All of these issues coincided with the departure of Lululemon’s longtime chief product officer Sun Choe, who resigned in May and joined Lululemon VF Corp. As part of her departure, McDonald unveiled a new product reporting structure that brings together Lululemon’s brand and merchandising teams under the leadership of Nikki Neuburger, chief brand and product activation officer. McDonald said the new structure makes the company more efficient and is “on track” to bring more new products to market in time for the spring selling season.

“Our teams were agile and looked for seasonal colors, prints and patterns. I’m sure you’ve seen several examples across our major franchises,” McDonald said. “These efforts contributed to the sequential improvement in new additions to our lineup in the second half of the year…we continue to see significant growth potential in the U.S.”

In a note, Neil Saunders, CEO of GlobalData, said it appears Lululemon’s product problems are behind it.

“In the third quarter, the women’s range felt fresh and interesting and there was more than enough to grab shoppers’ attention,” the retail analyst said. “This has both improved conversion rates and helped with average cart size. We believe Lululemon deserves praise for its quick course correction, which underscores that it is a merchant-led company.”

Lululemon’s troubles also came at a time when consumers, reeling from persistent inflation and an economy that feels worse than it perhaps actually is, are pickier than ever and less forgiving when a brand makes a mistake might.

Amid this difficult period, Lululemon has resorted to stock buybacks to keep Wall Street happy. The company this month approved a $1 billion increase to its share repurchase program. As of Thursday, there was still about $1.8 billion in the program.

Lululemon has also focused on increasing profitability amid uncertain demand. According to StreetAccount, gross margin grew more than expected in the third quarter, rising 1.5 percentage points to 58.5%, higher than the 57.5% expected by analysts.