Lululemon Q3 net revenue rose 18.7% year over year to $2.2 billion, with store comps up 9% and direct-to-consumer revenue up 18%.
Gross margin expanded by 110 basis points to 57%. Net income dropped 2.6% to $248.7 million. Inventory was down 4% by the end of the quarter.
Store traffic rose 25% in Q3 and e-commerce rose 20%, Chief Financial Officer Meghan Frank told analysts Thursday. The brand opened 14 net new stores in the period, ending with 686, and Frank said it expects to open about 25 more in the final quarter.
Lululemon’s popular belt bag may serve as a handy metaphor for the company’s trajectory: its strength has continued to be formidable, defying expectations that its power would wane. In the third quarter, the company’s “bag assortment grew in the strong double digits and the Everywhere Belt Bag posted solid growth on top of last year's standout performance,” CEO Calvin McDonald told analysts on a Thursday conference call.
But the belt bag and Lululemon itself may be hitting an inevitable plateau, according to an emailed research note from Jeffries analysts led by Randal Konik. Their comments echoed concerns expressed by a number of analysts ahead of the company’s Thursday report.
“As we stated a number of times, we’ve been wrong, as the belt bag fad lasted longer than we thought and the numbers in 2023 [year to date] have been great,” Konik said. “That being said, we have strong conviction in our views that competition is rising, the belt bag trend is fading, and the consumer is slowing, which means the greatness of [Lululemon] will see the laws of gravity ensue in 2024.”
McDonald himself downplayed the item’s importance in the scheme of things, even in what he deemed a $110 billion global accessories category where Lululemon, with less than 1% share, has room to grow.
“And what we're proving and continuing to see through newness and innovation is it's more than just the Everywhere Belt Bag,” he said. “That is a core item that is resonated, has and continues to perform incredibly well for us. But we're building out a very solid bag business with a lot of opportunity of growth moving forward.”
McDonald reported that Black Friday was its “single biggest day in company history, with strength across our store and e-commerce channels.” In Q3, as sales of adult active apparel fell in the U.S. Lululemon gained 1.5 points of market share, encompassing both men's and women's, McDonald said, citing Circana's consumer tracking service.
In part due to macroeconomic uncertainties, the company reiterated that it expects Q4 revenue to range between $3.1 billion and $3.2 billion, representing growth of 13% to 14%, Frank said. That could prove to be conservative, according to several analysts. Wells Fargo analysts led by Ike Boruchow said in emailed comments that the Black Friday performance sets Lululemon “up as one of the most likely names to post holiday upside,” despite ongoing concerns about demand in North America.
Still, while Wells Fargo edged up their per-share price target by $5, they maintained their view that the company’s potential is already baked into its valuation.