Lululemon sales soar 14%, but profit takes a hit
Lululemon on Wednesday reported third quarter net revenue of $619.0 million, a 14% increase compared to the year-ago period, or 12% on a constant dollar basis, according to a press release. Overall same-store sales rose 8% (or 7% on a constant dollar basis) as same-store sales in stores rose 2% (1% on a constant dollar basis) and direct-to-consumer net revenue rose 26% (25% on a constant dollar basis).
Gross profit in the quarter rose 16% to $322 million, as adjusted gross profit also rose 16% to $323.1 million. Gross margin rose 90 basis points over the year-ago quarter to 52%, and the company's adjusted gross margin rose 110 basis points to 52.2%. However, net income fell from $68.3 million a year ago to $58.9 million, in part to due the expense of restructuring its ivivva kids operations.
The company raised its outlook for the fourth quarter and full fiscal year. For Q4, it now expects net revenue to land between $870 million and $885 million, based on a total same-store sales increase in the mid-single digits. For the full fiscal 2017, the company now expects net revenue of around $2.6 billion.
Lululemon CEO Laurent Potdevin touted the company's vertical integration as a "core competitive advantage" that allowed it to pivot swiftly from merchandising missteps earlier this year. "We had end-to-end control of our every aspect of our business," he told analysts of the quarter on Thursday, according to a transcript from Seeking Alpha.
Physical stores are key to the company's results worldwide, he added, because they allow meaningful connection to customers. He suggested the company would expand. "Our nimble and constantly evolving store portfolio from locals to co-located and experientials are highly attuned to each market needs, reflecting industry-leading productivity while our footprint remains under-penetrated with only 388 locations across the globe," he said.
Along with the prominent role of stores, Potdevin predicted "a billion dollar digital business" by 2020. The company also sees opportunities for growth in its men's business and expansion online and abroad, particularly in China. Potdevin also promised an announcement next week on the women's design side, indicating that the company has no plans to let up on the women's athleisure market it innovated.
Its attention to the market and on quality helps Lululemon avoid heavy discounting in an era where it's rampant, according to GlobalData Retail analyst Kevin Wathey. "Lululemon, unlike so many of its rivals, has a lineup of products that people want and for which they are prepared to pay full price," Wathey said in a note emailed to Retail Dive. "Constant innovation and a laser-like focus on functionality and quality are central to this."
But the company's stores are a weakness, Wathey warns, noting that "their 2% increase in comparable sales" were "overshadowed by the 26% uplift in direct revenue." He added, "Although we maintain our view that growth in shops could be somewhat higher, we also believe that Lululemon is moving towards a seamless omnichannel model and is now using stores much more effectively to support online growth."
Lululemon is settling into a recovery from a couple of years ago, when quality and fashion missteps and a swell of competition from the likes of Gap's Athleta and sports stalwarts threatened its primacy. Fortunately for Lululemon, the Canadian brand is well differentiated, according to an email from Jane Hali & Associates analysts. "[Nike] and [Adidas] moving more into yoga wear can be competition for LULU, however at this time, we feel their product and messaging targets a different customer," Jane Hali said.
The challenge for Lululemon will be to maintain that momentum, but Wathey says that GlobalData Retail analysts believe that it can, thanks to strong customer acquisition fostered by an effective marketing campaign, along with potential growth online, overseas and in its men's business.
- press release lululemon athletica inc. Announces Third Quarter Fiscal 2017 Results
- Seeking Alpha Earnings Call Transcript Lululemon Athletica's CEO Laurent Potdevin on Q3 2017 Results
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