“Third quarter results, which exceeded our expectations, demonstrate the ability of our teams to be agile in a dynamic operating environment.
CFO Meghan Frank
a. Demand
Lululemon beat revenue estimates by 1.7% & beat revenue guidance by 1.8%. Its 13.5% 2-year revenue compounded annual growth rate (CAGR) compares to 7.2% last quarter and 17.2% two quarters ago.
Revenue rose by 8% Y/Y on a foreign exchange neutral (FXN) basis.
Americas revenue rose by 2% Y/Y (GAAP & FXN) and comparable sales fell by 2% Y/Y (GAAP & FXN). Growth was stable Q/Q for Americas overall.
Canadian revenue rose by 9% Y/Y; U.S. revenue was flat Y/Y and met expectations. This marked a needed sequential stabilization in Y/Y U.S. growth.
China revenue rose by 39% Y/Y and 36% Y/Y FXN vs. 37% FXN growth last quarter. Comparable sales there rose by 27% Y/Y and 24% Y/Y FXN vs. 23% Y/Y FXN growth last quarter.
Rest of World revenue rose by 27% Y/Y and 23% Y/Y FXN. Comparable sales rose by 23% and 20% Y/Y FXN. Growth was sequentially stable.
Of the 28 new stores added Q/Q, 14 came from its previous purchase of its Mexico franchise partner.
It also completed 13 more store optimizations during the quarter.
Men’s growth was 9% Y/Y vs. 11% last quarter; women’s growth was 8% Y/Y vs. 6% last quarter; accessories growth was 8% Y/Y vs. 7% last quarter.
Leadership told us that it gained share in men’s and women’s premium activewear in all geographies including the USA. This compares to stagnant market share for its women’s business last quarter and marks more men’s share gains.
b. Profits & Margins
Beat GAAP EBIT estimates by 5.5%.
Sales, General & Administrative (SG&A) was 38% of revenue vs. 38.2% Y/Y for 20 bps of leverage. Leverage came from corporate SG&A and operating channel cost leverage. Excluding FX translation headwinds, SG&A leverage would have been 50 bps Y/Y and would have met Lululemon guidance.
Beat $2.72 GAAP EPS estimates by $0.15 & beat guidance by $0.16.
Excluding the same Q3 2023 charges as above, EPS rose by 13.4% Y/Y. This is despite a 30.2% tax rate vs. 28.5% Y/Y.
Finally, Lululemon beat GAAP gross profit margin (GPM) estimates by 90 basis points (bps; 1 basis point = 0.01%). The 150 bps of Y/Y GPM expansion was helped by a 110 bps benefit from inventory provisions during Q3 2023. Without this help, GPM would have expanded by 40 bps Y/Y. Last quarter, Lulu told investors to expect about 55 bps of Y/Y GPM contraction, the 40 bps of expansion was thanks to “product management of fixed expenses and some expense timing benefits.” Flat Y/Y markdown rates also helped, as it maintained its full price discipline.
c. Balance Sheet
$1.2 billion in cash & equivalents.
$394 million in revolver capacity.
Inventory +8% Y/Y. Y/Y growth resumed as expected and as it guided to last quarter.
Diluted share count fell 3.2% Y/Y. It added another $1 billion in buyback capacity and now has $1.8 billion remaining in total (about 4% of the market cap).
d. Q4 Guidance & Valuation
Raised Q4 revenue guidance by 0.6%, which slightly missed estimates by 0.2%. This includes $20 million in incremental FX headwinds. Without this, it would have slightly beaten estimates and raised guidance by a little over 1%.
Lowered $5.65 Q4 EPS guidance by $0.05, which slightly missed estimates by $0.02. Lululemon excludes buybacks from EPS guidance. As you can see in the section above, share count is meaningfully shrinking and will contribute to EPS growth. The reduction was related to FX translation headwinds.
Guided to 25 bps in Y/Y GPM contraction for Q4, which is much better than the 75 bps contraction expectation.
Guided to 120 bps in Y/Y EBIT margin contraction for Q4 to support continued foundational investments. This is worse than 100 bps of Y/Y margin contraction expected, largely due to incremental FX translation headwinds.
Reiterated expectations for mid-teens Y/Y inventory growth in Q4
For the full year, it now sees 15 basis points of GPM expansion for the year vs. 20 bps of contraction previously guided to. Still, it continues to see 15 bps of EBIT margin contraction for the year, as FX translation headwinds and more investments led to rising SG&A expectations. It also expects to open 40 stores vs. 35-40 previously and still expects to complete 40 optimizations. It continues to expect flat Y/Y markdown rates for 2024 vs. 2023 and $680 million in annual CapEx to support stores and distribution center projects.
Finally, it reiterated 2026 targets including for North America. Its 2024 revenue guide results in a 19% revenue CAGR 3 years into its 5 year plan. This is well ahead of its 15% revenue CAGR forecast offered in 2021.
“We are pleased with our performance at the start of the holiday season, but given fewer shopping days between Thanksgiving and Christmas and an uncertain macro environment, we continue to plan the business prudently.”
CFO Meghan Frank
e. Call & Release
Holiday Season Results:
Leadership told us that holiday reason results are trending better than expected for Q3 and so far in Q4. Its app and website set traffic records during Black Friday, and did so through the same selective discounting philosophy Lulu has always embraced. It avoided full-store discounts and merely “leveraged the increased traffic” to work through sunsetting items. It maintained strict full-price discipline for core franchises.
USA Progress:
As a reminder, Lululemon’s USA business is going through an overhaul. While macro has hurt this company a bit, its own execution in this immensely important market has arguably held it back more. It’s focused on two things to right the ship: streamlined org structure and “newness.”
Its realigned reporting structure that we’ve previously covered is going well. It has fully unified its brand and merchandising teams to drive more streamlined, cohesive inventory decisions, and innovation cycles. Generally speaking, it’s already starting to create better communication and execution.
As leadership explained over the last few quarters, it hasn’t had enough “newness” in its stores. Customer traffic retention is strong, but conversion rates are suffering a bit as frustrated shoppers simply don’t find what they want. When Lululemon does have this fresh, relevant inventory in, it’s flying off the shelves. It just needs a lot more of it. Importantly, newness inventory penetration rose Q/Q and revenue directly improved as a result. It’s also on track to get back to historical levels of newness by the end of Q1 2025. As that plays out, guests are responding positively:
“When we have the newness, he and she are responding well to it… Guests are waiting for us to hit those historical newness levels.”
CEO Calvin McDonald
“Newness” mainly refers to adding new colors and patterns to proven Lulu franchises, which diminishes execution risk, as the company already knows these items work when in stock. Brand new product launches will continue, but will play a more secondary role for now.
While growth in the USA has been challenged this year, that’s somewhat related to wildly difficult comps from 2023. Those comps get far easier in 2025… right as inventory gaps are plugged and it continues to build on its 36% aided brand awareness. Along these lines, during the Q&A, CFO Meghan Frank told us that mid-teens inventory growth guidance for Q4 is “to set up for its goals, specifically in the USA.” Its stated “goal” is for inventory growth and revenue growth to be identical. So? If it’s saying inventory growth of roughly 15% is based on USA expectations for 2025, to me that means it expects a sharp acceleration to unfold. I don’t think that’s a stretch. It has offered vague commentary on better USA growth in 2025 vs. 2024 in the recent past, but I still loved hearing this. So important.
It now has 24 million people in its membership program vs. 20 million 6 months ago. It’s delivering strong momentum with younger guests. Membership programs make for hyper-targeted marketing channels for Lululemon to deepen connections with its loyal customers.
It will continue to optimize its store footprint in the USA to add square footage and drive more growth.
International:
Lulu’s international business continues to thrive. Its largest-to-date brand campaign in China generated 3.8 billion social media impressions and delivered brand awareness gains. In Asia Pacific, it pushed ahead in its store investments to deliver a more “premium shopping experience.” This is already delivering faster men’s and e-commerce growth. In Europe, The Middle East and Africa (EMEA), store optimizations in Oslo and Berlin to add more capacity are going well.
Looking ahead, for 2025, it plans to enter Italy, Denmark, Belgium, Turkey and the Czech Republic. The Italy business will be company-owned, with the others featuring a partner franchise model.
Products:
Its Lululemon Tennis Club collection (released during the U.S. Open) performed quite well. The results are emboldening LULU leadership to see sports as a larger growth opportunity (not just for golf). Going forward, it will move from more of a seasonal push to more consistent inventory refreshes.
It’s also pleased with new partnerships with Fanatics and Disney. This builds on its “targeted” partnership program with university bookstores to extend Lulu’s reach and attach its name to other iconic brands.
Leggings were cited as a highlight for Lululemon. This is important considering it has had some execution issues here in recent quarters.
Accessories growth was powered by backpacks and cross-body bags.
f. Take
Solid quarter. Not amazing, but certainly mainly positive for a company that has been hammered with negative sentiment and some fundamental struggles this year. The international business continues to kill it and has a massive runway that includes large countries it hasn’t even entered. The U.S. business began to show sorely needed signs of life, and leadership’s optimism surrounding that market for 2025 was palpable.
Many were ready to pronounce this company as dead. As I’ve said countless times, Lululemon’s perceived structural brand decay has been grossly overstated. Just because there are other brands in a $300 billion athleisure space doesn’t mean King Lulu can’t keep winning. Omni-channel traffic trends loudly screamed to us that this brand was just fine and had customers yearning for fresher inventory. The fix was wonderfully obvious: Fix assortment issues to improve shopper conversion rates. And? It’s well on its way to do just that. Results should keep brightening in the quarters to come as this name trades near decade lows for forward valuation. I’d just like to note… It’s “amazing” how quality consumer discretionary brands all “die” right when macro cycles sour… only to be “reborn” as soon as the Fed and macro begin to cooperate once more. Coincidence? Nope. But I digress. Good quarter.
