Lululemon on Thursday reported that second quarter net revenue rose 14% to $581.1 million, or 13% on a constant dollar basis. Total same-store sales (including e-commerce) in the quarter rose 7% by either measure.
Otherwise, same-store sales rose 2%, the same on a constant dollar basis, and direct-to-consumer net revenue increased 29%, or 30% on a constant dollar basis, thanks in part to an online warehouse sale held in the period, according to a company press release. Excluding the impact of this sale, direct-to-consumer net revenue rose 15%, or 16% on a constant dollar basis.
Operating margin fell 260 basis points from the year-ago period to 11.8%, as adjusted operating margin was 12.8%, a decrease of 160 basis points. Income from operations fell 7% year over year to $68.7 million. Excluding costs of its ivivva restructuring, adjusted gross margin rose 220 basis points versus last year, driven mostly by a 260 basis point increase in overall product margin thanks to product mix and lower cost, partly offset by markdowns during the online warehouse sale. Offsetting those factors were 20 basis points related to foreign exchange and 20 basis points of in occupancy, depreciation and product and supply chain costs, the company said.
Lululemon launched an army of imitators in the athleisure space and has been grappling with the rising competition for several quarters now, mostly hanging on to its much higher prices and resistance to markdowns. The competition hasn’t forced price modulation all that much, but it has meant that Lululemon pays whenever its styles or quality suffer.
After some missteps along those lines, the yoga wear maker is demonstrating a rebound. The brand is now focusing on not just yoga and other athletic endeavors, but also on meditation and "letting go" — what it’s calling "Mindfulosophy." Lululemon also continues with fabric innovation, including its new athletic Enlite bra and high-intensity Everlux, which Potdevin explained "is designed for workouts like spin where studio environment provides little air flow and high humidity, as Everlux wicks away sweat like nothing else." The company has addressed the blandness in its women’s lines, and analysts at GlobalData Retail expect the brand to be a good seller at the holidays.
The company is also expanding in Europe and Asia. "Someone, it seems, forgot to inform Lululemon that there is a slowdown in the growth of athleisure," GlobalData Retail Managing Director Neil Saunders said in an email to Retail Dive. "Its results stand in direct contrast to those of many other sporting retailers…[T]he numbers are a testament to Lululemon's brand strength, the credibility of its products, and to its constant focus on innovation. They have enabled the group to take share in a crowded, competitive marketplace where consumer demand is a little more muted than it once was….[T]he continued investment in new fabrics and designs has encouraged upgrading and new purchases alike."
The company’s mens lines also are gaining traction with 23% growth in the quarter. CEO Laurent Potdevin told analysts on Thursday that the category is "still one of our best kept secrets," adding that the company is focusing on customer acquisition and "talking to men in unexpected ways through curated and targeted experiences," according to a transcript of the company’s conference call with analysts published by Seeking Alpha.
GlobalData took note of these efforts: Saunders said that Lululemon is doing quite a bit better appealing to men than rivals are in marketing to new demopraphics. "In successfully pivoting from being a women's brand to one that now appeals to both genders, Lululemon stands in marked contrast to Under Armour, which has seen only limited success in attracting women," Saunders said. "This augurs well for the future as we believe Lululemon has much more runway with male shoppers."
Lululemon represents a challenge not only to other athletic brands, but also to sports retailers, he warned. "[M]any of the problems faced by players like Dick's or Foot Locker stem, not solely from the fact that athletic wear demand is more subdued, but because consumers are increasingly switching to buying directly from brands," Saunders said. "Lululemon is proof that a well-configured, focused brand can secure customer loyalty far better than a retailer selling a diffuse range of different products with little coherence."
Lululemon’s softer margin and profit numbers don’t worry Saunders because, he said, they are "a consequence of the various investments and initiatives Lululemon is undertaking to strengthen its position in the market. Given these are bearing fruit, the long-term prognosis still looks good."