- First revenue miss in over two years
- Full year guidance trimmed
- 30% overseas growth pleases
Coming out of the gate there was a sour reaction to second quarter results (29 August) from Canadian athleisure specialist Lululemon (LULU:NASDAQ), which revealed a first sales miss in more than two years and a cut to full year guidance from the yoga pants to belt bags purveyor.
So why did the stock rally 4.6% to $271 in pre-market trading on Wall Street?
Well, there was relief as Lululemon’s strengthened margins helped it beat earnings estimates, while a near-30% rise in international sales demonstrated the brand still has growth legs overseas.
BOTCHED LEGGINGS LAUNCH
Results for the quarter ended 28 July showed revenue of $2.37 billion, up 7% year-on-year but below the $2.41 billion Wall Street was expecting as growth slowed in the Americas and Lululemon botched a keenly awaited product launch.
The company yanked its Breezethrough leggings from the shelves following a swathe of negative reviews and customer complaints.
Subdued comparable sales growth of 2% came in shy of expectations, dragged down by a 3% decline in the Americas, Lululemon’s largest region.
However, earnings per share of $3.15 beat the $2.93 the market was looking for, while an 80 basis point increase in gross margin to 59.6% topped 57.7% analysts forecasts and Lululemon’s operating margin and operating income both expanded.
CEO Calvin McDonald lauded Lululemon’s ‘ongoing strength across our international business’ - sales surged 29% overseas as the company made positive strides in China - and assured scribes the Lululemon brand ‘remains strong in the US market’.
Lululemon now expects full year revenue to be between $10.38 billion and $10.48 billion, a downgrade from previous guidance for sales in the $10.7 billion to $10.8 billion range. The company also cut its earnings per share guidance from between $14.27 and $14.47 to a range of $13.95 to $14.15.
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould pointed out that competition is intensifying for Lululemon as other companies fight for a slice of the pie, having seen a surge in demand over the past decade for athleisure products.
‘Layer on top the prospect of high interest rates making some consumers think twice about spending on non-essential items and you’ve got a much tougher backdrop for Lululemon,’ explained Mould.
He continued: ‘Add these negative factors together and you could have seen a catastrophic set of results. However, Lululemon is one of the few companies where China has come to the rescue rather than been a drag. Consumers in this part of Asia have snapped up its products in droves, making China the major engine for its overseas operations.
‘The company believes it is still early days for growth in China and it is taking a localised approach to brand building, working with fitness instructors and influencers to get its name out there, and so far, its marketing strategy appears to be working.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
