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1. Lululemon Athletica (LULU) -- Earnings Review

1a. Demand

Lululemon guided to $1.76 billion in sales while analysts expected $1.77 billion. The company posted $1.87 billion in sales, beating its expectations by 6.3% and analyst estimates by 5.6%.

More demand context:

Total comparable sales (same store sales + Direct to Consumer (DTC) revenue) rose 23% YoY vs. 24% YoY last quarter. Note that this excludes temporarily closed stores due to the pandemic.
On a 3-year basis, revenue is compounding at a 28% clip. This slightly accelerated QoQ.
Same store traffic continues to compound at a brisk clip of 8% on a 3-year basis while e-commerce traffic is compounding at a 40% 3-year clip.
DTC represents 42%% of sales vs. 41% last year. This is higher margin business.
International revenue grew 35% YoY while China continues to rebound as it moves away from yet another round of pandemic lockdowns.
- Lulu now operates 40 stores in China after opening up 8 more this quarter. This is a big piece of the international growth push. As a reminder, it launched a new digital store on JD.com in that country during the quarter.
Men’s grew by 30% on a 3-year compounded basis vs. 25% for women.

1b. Profitability

Lululemon guided to earnings of $1.85 per share while analysts expected $1.86. It earned $2.20, beating its expectations and analyst estimates by roughly 19%. GAAP earnings came in at $2.26. Note that GAAP earnings is higher because it excludes a small loss on the disposal of assets.

More context on margins:

YoY GPM compression was due to freight and supply issues shaving 150 bps off of it as well as FX impacts erasing another 40 bps. Without these headwinds, GPM would have been 58.4% and expanded 30 bps YoY.
Inventory rose 85% YoY this quarter. That’s why cash flow margins were negative. Much more on this later.
- Free Cash Flow margin was also hit by a near doubling of CapEx YoY mainly related to its new distribution center build-out.

1c. Balance Sheet

The company has $500 million in cash and equivalents vs. $650 million last quarter as it builds out its inventory and buys back shares.
This quarter, it bought back $125.3 million worth of stock as part of its billion dollar authorization.
It still has roughly $400 million untapped on its current credit facility.

1d. 2022 Guidance

Lululemon previously guided to sales of $7.66 billion while analysts had expected $7.69 billion. It updated its guidance to $7.90 billion, raising its expectations by 3.1% and beating analyst estimates by 2.7%.
Lululemon previously guided to adjusted EPS of $9.53 while analysts had expected $9.43. It updated its guidance to earnings of $9.82, raising its expectations by 3.0% and beating analyst estimates by 4.1%.
- It also raised its GAAP earnings guide from $9.50 to $9.90 for the year.
Lululemon also now expects gross profit margin to fall by 115bps YoY vs. previous expectations for falling 125bps YoY (mainly freight related). It
Lululemon expects about 130bps of SG&A leverage mainly due to outperforming demand (and so getting more out of its fixed cost base).
The company expects e-commerce growth in the low to mid 20% range for the year and to open 75 new retail stores total.

3rd quarter 2022 guidance was similarly strong on the top and bottom lines.

“Based on our guidance, we expect a high level of performance to continue next quarter.” -- CEO Calvin McDonald

1e. Notes from CEO Calvin McDonald

On Macro & Inventory:

Lululemon and McDonald have been intensively monitoring guest data and spend to identify consumption shifts due to deteriorating macro. It has seen 0 negative impact to date. New guest acquisition “remains strong” with first timers rising 24% YoY and existing shopper frequency rising 17% YoY. Importantly, this traffic is NOT being created through pricing promotions as its business remains “predominately full price.” It has not changed its mark-down strategy and “has no plans to do so.” Mark-down rates are flat vs. pre-pandemic.

And speaking of mark-down cadence, the only concern coming out of this report was inventory rising around 85% YoY. There are a few notes I’d like to offer on why this doesn’t concern me. First, is its ability to sell most gear at full price and its continued robust forward demand outlook. But most importantly, we are still comping vs. a time when Lululemon was having significant trouble sourcing inventory from the supply chain chaos. Those supply chains have since eased a bit and Lulu is taking advantage. According to the team, “it was leaving demand on the table” last year via frequent out-of-stocks and this is its normalization of inventory levels. It sees today’s inventory position as far healthier than Q2 2021.

“We remain comfortable with both our quality and quantity of inventory. We are well positioned for the fall season.” -- CEO Calvin McDonald

“We are pleased to see some promising signs of supply chain improvement yet recognize further normalization will take time.” -- CEO Calvin McDonald

The bulk of its supply chain headaches have come from frequent opening and re-closing of the Chinese ports and economy due to the pandemic. A significant portion of its operations are connected to that economy. Now -- per McDonald -- vendors in China who had to close last quarter due to renewed pandemic outbreaks “are catching back up” with global supply chain needs. Overall vendor readiness specifically, which spiked from 45 days to 90 days last year, is back down to 70 days.

On the Lulu Play Category (Golf, Tennis, Hiking):

“We’re thrilled by the early reaction to our hike collection which launched in Q2… we will continue to expand the new category to include heavier styles to protect against the elements during cold gatherings.” -- CEO Calvin McDonald

On Footwear:

Its first women’s shoe -- Blissfeel -- “continues to perform well.” Lulu was having issues sourcing inventory for the popular running shoe after its debut, but those issues are now behind it.
This quarter, it launched RestFeel (a multi-gender slide) and Chargefeel (a women’s trainer). It will launch Strongfeel (a shoe “designed to keep the foot anchored and secured during workouts”) this year.

On the New Membership Program -- Launching soon:

This will have a free tier functioning like a loyalty program for Lulu apparel benefits. The paid tier will involve a MIRROR (to be re-branded Lululemon studio) membership.

On International:

As previously covered, Lululemon is entering Spain which is its first new launch in Europe since 2019. The e-commerce store is open there now and its Barcelona store opened this past week. Its Madrid store will open soon.

“International is one of the key pillars to our Power of Three x2 growth plan which calls for a 4Xing of our international revenue by 2026. We are off to a great start.” -- CEO Calvin McDonald

On Products:

Launched SenseKnit -- a new fabric offering “zone compression for runners.”
It’s now expanding into heat retention fabrics for runners to enter more cold-weather use cases. Furthermore, it’s creating “reflective detailing” to enable safer running in the dark.
Its new Scuba line continues to thrive out of the gate.
The company will re-launch its unicorn tears print style for some SKUs. This hasn’t been available in a decade.

“We’ve definitely seen market share gains. According to NPD, we were the largest share gainer in the quarter at 1.4%.” -- CEO Calvin McDonald

News of the Week (August 29th - September 2nd)