Lululemon Does Not Need to Chase Growth

Last Thursday, Lululemon Athletica LULU posted its fiscal third-quarter earnings and sales that topped analysts estimates, along with raising its full-year outlook. However, the market focused on the multinational athletic apparel retailer lowering its expectations for annual sales of its at-home fitness device, Mirror, despite CEO Calvin McDonald being pleased with the early-holiday season momentum.

Third Quarter Performance

For the quarter that ended on October 31^st, sales rose about 30% compared to last year's $1.12 billion to $1.45, topping expectations of $1.41 billion. Profitability rose thanks to the combination of sales growth and rising average prices. Net income rose from $143.6 million in last year's comparable quarter to $187.8 million, or $1.44 per share. Excluding one-time items, earnings per share amounted to $1.62 per share which topped expectations of $1.41. Moreover, Thanksgiving online sales were their highest in a single day on record.

Businesses Under a Magnifying Glass

The boost was largely driven by Lululemon's men's business which the company plans to double by 2023. Its plans for the division seem to be running well ahead of schedule as it grew 44% YoY. Sales in its core business, womenswear, rose 25%. Same-store sales, which measure sales at stores open for at least 12 months, rose 32% as in North America, sales rose 28% YoY while the international segment prospered 40%.

Outlook

Lululemon lowered its annual outlook for Mirror sales from $250 million and $275 million to a new range between $125 million and $130 million.

For the fourth quarter, revenue is expected in the range between $2.13 billion to $2.17 billion with adjusted earnings per share between $3.25 and $3.32, both of which coincide with $2.17 billion and $3.30 per share that analysts estimated.

The full-year revenue outlook has been upgraded to a range of between $6.25 billion and $6.29 billion from $6.19 billion to $6.26 billion. Analysts expect $6.27 billion. Annual diluted earnings per share are expected between $7.38 to $7.45 or $7.69 and $7.76 per share after adjustments. Analysts expect $7.51.

It Has Been a Challenging Year for Digital Fitness

The same pressures have hit rival Peloton Interactive Inc PTON which recently slashed its revenue outlook in a highly competitive environment with rivals like Nike NKE, Adidas ADDYY, and Under Armour Inc UA. To make things worse, consumers are leaving their home gyms behind for actual gyms. But Lululemon's McDonald clearly stated that Lululemon does not need to chase growth at all costs.

In a nutshell, growth trends held at historically high levels through the third quarter and profitability rose despite surging costs and the ongoing supply-chain issues that are plaguing pretty much all industries. Chief Executive Calvin McDonald is also pleased with the early holiday momentum as shoppers have been spending money on workout apparel both for themselves and as gifts for others.

Future Seems Bright

With the international expansion, new demographics like menswear, and attractive niches on the horizon both within and out of the athleisure category, such as the 2022 launch of its own brand of athletic shoes which was confirmed during the earnings call, the company has good odds at boosting sales throughout 2023. The company's core apparel business is firing on all cylinders and additional avenues for growth include Mirror and athletic shoes. Based on the above evidence, it can only be concluded that Lululemon delivered a great quarter and that it has long runway for growth ahead.

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