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Lululemon's Q2 Mixed: Earnings Beat, Sales Lag Estimates in Americas
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lululemon athletica inc. (LULU - Free Report) reported second-quarter fiscal 2024 results, wherein earnings beat the Zacks Consensus Estimate and improved year over year. Meanwhile, sales missed after surpassing the Zacks Consensus Estimate for eight consecutive quarters. The company’s top line improved year over year on continued strength in the international business.
In the second quarter of fiscal 2024, the company pulled back its Breeze Through leggings line, launched earlier in the quarter, following negative customer feedback. LULU stated that it was a test-and-learn experience. However, the company noted that this pull-out had a negligible impact on its fiscal second-quarter performance.
The company remains on track with the Power of Three X2 growth plan. LULU outlined the guidance for the fiscal third quarter. However, it slashed its revenue and EPS guidance for fiscal 2024.
The Zacks Rank #4 (Sell) company has seen its shares decline 17% in the past three months compared with the industry’s fall of 8.1%.
Image Source: Zacks Investment Research
LULU’s Q2 Earnings Overview
lululemon’s fiscal second-quarter earnings of $3.15 per share increased 17.5% year over year. The bottom line also surpassed the Zacks Consensus Estimate of $2.92. Earnings per share (EPS) were driven by an improved gross margin, which benefited from better-than-expected markdowns, a favorable mix and prudent management of fixed expenses within the gross margin.
The Vancouver, Canada-based company’s quarterly revenues advanced 7.3% year over year to $2.371 billion and outpaced the Zacks Consensus Estimate of $2.404 billion. On a constant-dollar basis, net revenues improved 8% year over year in the fiscal second quarter. Net revenues grew 1% in the Americas (up 2% on a constant-dollar basis) and 29% internationally (up 31% on a constant-dollar basis).
Total comparable sales (comps) rose 2% year over year and 3% on a constant-dollar basis. Comps in the Americas declined 3% year over year and 2% on a constant-dollar basis. Internationally, comps increased 19% and 22% on a constant-dollar basis.
lululemon athletica inc. Price, Consensus and EPS Surprise
In the store channel, the company’s total sales increased 11% in the fiscal second. Digital revenues improved 2% year over year and contributed 38% to the total revenues.
Gross profit improved 8.8% year over year to $1.4 billion. Also, the gross margin expanded 80 basis points (bps) to 59.6%, led by a 130-bps rise in the product margin due to lower product costs, flat markdowns and a 30-bps deleverage on fixed costs, offset by 20 bps negative impacts of foreign exchange.
Nonetheless, management noted that gross margin growth in the quarter was better than its guidance of a 100-110 bps decline on lower-than-expected markdowns, efficient expense management, and a favorable mix. We expected the gross margin to contract 110 bps year over year to 57.7% for the fiscal second quarter.
SG&A expenses of $872 million increased 6.7% from the year-ago quarter. SG&A expenses as a percentage of net revenues of 36.8% declined 20 bps from 37% in the prior-year quarter. The decline in SG&A expense rate was less than a dip of 40-60 bps anticipated by the company.
Our model predicted SG&A expenses to rise 7.8% year over year for the fiscal second quarter, with a 60-bps decline in the SG&A expense rate to 36.4%.
Operating income rose 12.7% year over year to $540.2 million in the fiscal second quarter. The operating margin of 22.8% expanded 110 bps year over year. Our model predicted a 7% year-over-year increase in operating income. We estimated the operating margin to decline 50 bps year over year to 21.2%.
Snapshot of lululemon’s Store Plans
In the fiscal second quarter, LULU opened 11 company-operated stores and closed one. The company also completed six store optimizations. As of Jul 28, 2024, LULU operated 721 stores.
For the third quarter of fiscal 2024, lululemon plans to open 14 company-operated stores. For fiscal 2024, it anticipates opening 35-40 company-operated stores and completing 40 co-located optimizations, contributing to overall square footage growth in the low-double digits. The store openings in fiscal 2024 will include five to 10 stores in the Americas. The rest of the store openings in fiscal 2024 are expected to occur in the international markets, primarily in Mainland China.
Presenting LULU’s Other Financial Details
lululemon exited the quarter with cash and cash equivalents of $1.6 billion and stockholders’ equity of $4 billion. Its inventories decreased 14% year over year to $1.4 billion. Capital expenditure was $145 million in the fiscal second quarter.
In the fiscal second quarter, lululemon repurchased 1.9 million shares for $583.7 million at an average price of $310. Year to date, the company has repurchased shares worth $1.2 billion under its share buyback program. As of Aug 29, 2024, it had $1 billion remaining under its current share repurchase authorization.
What to Expect From lululemon in Q3 & FY24?
lululemon expects the second half of fiscal 2024 to be almost in line with the second quarter of fiscal 2024, excluding the impacts of the 53rd week and a shorter holiday shopping period in the fourth quarter. While the company is optimistic about its fiscal 2024 performance, it remains cautious due to the uncertainties in the macro environment. Hence, it lowered its revenue and EPS forecast for fiscal 2024.
For the third quarter of fiscal 2024, management anticipates net revenues of $2.34-$2.365 billion, indicating 6-7% year-over-year growth. The company expects the gross margin to contract 50-60 bps year over year, driven by deleverage on fixed costs and ongoing investment in the multi-year distribution center project. LULU expects the product margin to be relatively flat year over year in the fiscal third quarter, including a 60-bps increase in freight costs and flat markdowns.
SG&A, as a percentage of sales, is likely to leverage 40-50 bps year over year due to leverage on top-line and ongoing expense management. The operating margin for the fiscal third quarter is expected to deleverage 10-20 bps year over year.
EPS for the fiscal third quarter is expected to be $2.68-$2.73, whereas it reported an adjusted EPS of $2.53 in the prior-year quarter. It estimates an effective tax rate of 30% for the fiscal third quarter.
The company expects dollar inventory to increase in the mid-teens in the fiscal third quarter, whereas it reported a decline in the prior year.
For fiscal 2024, LULU anticipates net revenues of $10.375-$10.475 billion, suggesting 8-9% year-over-year growth and a 6-7% rise, excluding the 53rd week in 2024. Earlier, the company predicted revenue growth of $10.7-$10.8 billion for fiscal 2024, suggesting year-over-year growth of 11-12% and a 10-11% rise, excluding the 53rd week. The company expects a 3% impact on revenues from a shorter holiday season in fiscal 2024.
lululemon anticipates the gross margin to be down 20 bps year over year compared with a flat projection earlier. The lowered gross margin view reflects a deleverage on fixed costs related to the lower sales forecast, higher freight costs and flat markdowns. The SG&A expense rate is expected to be flat year over year in fiscal 2024, driven by prudent expense management. LULU expects the fiscal 2024 operating margin to contract 10-20 bps year-over-year.
The company projects an EPS of $13.95-$14.15, suggesting an increase from the $12.77 reported in fiscal 2023. However, the revised guidance reflects a decline from the $14.27-$14.47 expected earlier. LULU anticipates an effective tax rate of 30% for fiscal 2024.
lululemon expects a capital expenditure of $670-$690 million for fiscal 2024. As part of the Power of Three X2 growth plan, LULU estimates net revenues of $12.5 billion by 2026, implying significant growth from the 2021 reported figure of $6.25 billion.
Solid Picks in LULU’s Broader Sector
We have highlighted three better-ranked stocks from the Zacks Discretionary Staples sector, namely Wolverine World Wide (WWW - Free Report) , Steven Madden (SHOO - Free Report) and Kontoor Brands (KTB - Free Report) .
Wolverine engages in the designing, manufacturing and distribution of a wide variety of casual, as well as active apparel and footwear. It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Wolverine’s current fiscal-year earnings indicates substantial growth from the year-ago period’s reported figure. WWW has a trailing four-quarter average earnings surprise of 7.5%.
Steven Madden designs, sources, markets and sells fashion-forward name-brand and private-label footwear for women, men, and children, and private-label fashion handbags and accessories across the world. It has a Zacks Rank #2 (Buy) at present.
The Zacks Consensus Estimate for Steven Madden’s current fiscal-year earnings and sales indicates growth of 12.6% and 6.9%, respectively, from the year-ago period’s reported figures. SHOO has a trailing four-quarter average earnings surprise of 9.5%.
Kontoor Brands is an apparel company. The company currently carries a Zacks Rank #2. KTB has a trailing four-quarter average earnings surprise of 12.3%.
The Zacks Consensus Estimate for Kontoor Brands’ current fiscal-year sales and EPS indicate growth of 0.1% and 12.7%, respectively, from the year-ago period’s reported figures.
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Lululemon's Q2 Mixed: Earnings Beat, Sales Lag Estimates in Americas
lululemon athletica inc. (LULU - Free Report) reported second-quarter fiscal 2024 results, wherein earnings beat the Zacks Consensus Estimate and improved year over year. Meanwhile, sales missed after surpassing the Zacks Consensus Estimate for eight consecutive quarters. The company’s top line improved year over year on continued strength in the international business.
In the second quarter of fiscal 2024, the company pulled back its Breeze Through leggings line, launched earlier in the quarter, following negative customer feedback. LULU stated that it was a test-and-learn experience. However, the company noted that this pull-out had a negligible impact on its fiscal second-quarter performance.
The company remains on track with the Power of Three X2 growth plan. LULU outlined the guidance for the fiscal third quarter. However, it slashed its revenue and EPS guidance for fiscal 2024.
The Zacks Rank #4 (Sell) company has seen its shares decline 17% in the past three months compared with the industry’s fall of 8.1%.
Image Source: Zacks Investment Research
LULU’s Q2 Earnings Overview
lululemon’s fiscal second-quarter earnings of $3.15 per share increased 17.5% year over year. The bottom line also surpassed the Zacks Consensus Estimate of $2.92. Earnings per share (EPS) were driven by an improved gross margin, which benefited from better-than-expected markdowns, a favorable mix and prudent management of fixed expenses within the gross margin.
The Vancouver, Canada-based company’s quarterly revenues advanced 7.3% year over year to $2.371 billion and outpaced the Zacks Consensus Estimate of $2.404 billion. On a constant-dollar basis, net revenues improved 8% year over year in the fiscal second quarter. Net revenues grew 1% in the Americas (up 2% on a constant-dollar basis) and 29% internationally (up 31% on a constant-dollar basis).
Total comparable sales (comps) rose 2% year over year and 3% on a constant-dollar basis. Comps in the Americas declined 3% year over year and 2% on a constant-dollar basis. Internationally, comps increased 19% and 22% on a constant-dollar basis.
lululemon athletica inc. Price, Consensus and EPS Surprise
lululemon athletica inc. price-consensus-eps-surprise-chart | lululemon athletica inc. Quote
In the store channel, the company’s total sales increased 11% in the fiscal second. Digital revenues improved 2% year over year and contributed 38% to the total revenues.
Gross profit improved 8.8% year over year to $1.4 billion. Also, the gross margin expanded 80 basis points (bps) to 59.6%, led by a 130-bps rise in the product margin due to lower product costs, flat markdowns and a 30-bps deleverage on fixed costs, offset by 20 bps negative impacts of foreign exchange.
Nonetheless, management noted that gross margin growth in the quarter was better than its guidance of a 100-110 bps decline on lower-than-expected markdowns, efficient expense management, and a favorable mix. We expected the gross margin to contract 110 bps year over year to 57.7% for the fiscal second quarter.
SG&A expenses of $872 million increased 6.7% from the year-ago quarter. SG&A expenses as a percentage of net revenues of 36.8% declined 20 bps from 37% in the prior-year quarter. The decline in SG&A expense rate was less than a dip of 40-60 bps anticipated by the company.
Our model predicted SG&A expenses to rise 7.8% year over year for the fiscal second quarter, with a 60-bps decline in the SG&A expense rate to 36.4%.
Operating income rose 12.7% year over year to $540.2 million in the fiscal second quarter. The operating margin of 22.8% expanded 110 bps year over year. Our model predicted a 7% year-over-year increase in operating income. We estimated the operating margin to decline 50 bps year over year to 21.2%.
Snapshot of lululemon’s Store Plans
In the fiscal second quarter, LULU opened 11 company-operated stores and closed one. The company also completed six store optimizations. As of Jul 28, 2024, LULU operated 721 stores.
For the third quarter of fiscal 2024, lululemon plans to open 14 company-operated stores. For fiscal 2024, it anticipates opening 35-40 company-operated stores and completing 40 co-located optimizations, contributing to overall square footage growth in the low-double digits. The store openings in fiscal 2024 will include five to 10 stores in the Americas. The rest of the store openings in fiscal 2024 are expected to occur in the international markets, primarily in Mainland China.
Presenting LULU’s Other Financial Details
lululemon exited the quarter with cash and cash equivalents of $1.6 billion and stockholders’ equity of $4 billion. Its inventories decreased 14% year over year to $1.4 billion. Capital expenditure was $145 million in the fiscal second quarter.
In the fiscal second quarter, lululemon repurchased 1.9 million shares for $583.7 million at an average price of $310. Year to date, the company has repurchased shares worth $1.2 billion under its share buyback program. As of Aug 29, 2024, it had $1 billion remaining under its current share repurchase authorization.
What to Expect From lululemon in Q3 & FY24?
lululemon expects the second half of fiscal 2024 to be almost in line with the second quarter of fiscal 2024, excluding the impacts of the 53rd week and a shorter holiday shopping period in the fourth quarter. While the company is optimistic about its fiscal 2024 performance, it remains cautious due to the uncertainties in the macro environment. Hence, it lowered its revenue and EPS forecast for fiscal 2024.
For the third quarter of fiscal 2024, management anticipates net revenues of $2.34-$2.365 billion, indicating 6-7% year-over-year growth. The company expects the gross margin to contract 50-60 bps year over year, driven by deleverage on fixed costs and ongoing investment in the multi-year distribution center project. LULU expects the product margin to be relatively flat year over year in the fiscal third quarter, including a 60-bps increase in freight costs and flat markdowns.
SG&A, as a percentage of sales, is likely to leverage 40-50 bps year over year due to leverage on top-line and ongoing expense management. The operating margin for the fiscal third quarter is expected to deleverage 10-20 bps year over year.
EPS for the fiscal third quarter is expected to be $2.68-$2.73, whereas it reported an adjusted EPS of $2.53 in the prior-year quarter. It estimates an effective tax rate of 30% for the fiscal third quarter.
The company expects dollar inventory to increase in the mid-teens in the fiscal third quarter, whereas it reported a decline in the prior year.
For fiscal 2024, LULU anticipates net revenues of $10.375-$10.475 billion, suggesting 8-9% year-over-year growth and a 6-7% rise, excluding the 53rd week in 2024. Earlier, the company predicted revenue growth of $10.7-$10.8 billion for fiscal 2024, suggesting year-over-year growth of 11-12% and a 10-11% rise, excluding the 53rd week. The company expects a 3% impact on revenues from a shorter holiday season in fiscal 2024.
lululemon anticipates the gross margin to be down 20 bps year over year compared with a flat projection earlier. The lowered gross margin view reflects a deleverage on fixed costs related to the lower sales forecast, higher freight costs and flat markdowns. The SG&A expense rate is expected to be flat year over year in fiscal 2024, driven by prudent expense management. LULU expects the fiscal 2024 operating margin to contract 10-20 bps year-over-year.
The company projects an EPS of $13.95-$14.15, suggesting an increase from the $12.77 reported in fiscal 2023. However, the revised guidance reflects a decline from the $14.27-$14.47 expected earlier. LULU anticipates an effective tax rate of 30% for fiscal 2024.
lululemon expects a capital expenditure of $670-$690 million for fiscal 2024. As part of the Power of Three X2 growth plan, LULU estimates net revenues of $12.5 billion by 2026, implying significant growth from the 2021 reported figure of $6.25 billion.
Solid Picks in LULU’s Broader Sector
We have highlighted three better-ranked stocks from the Zacks Discretionary Staples sector, namely Wolverine World Wide (WWW - Free Report) , Steven Madden (SHOO - Free Report) and Kontoor Brands (KTB - Free Report) .
Wolverine engages in the designing, manufacturing and distribution of a wide variety of casual, as well as active apparel and footwear. It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Wolverine’s current fiscal-year earnings indicates substantial growth from the year-ago period’s reported figure. WWW has a trailing four-quarter average earnings surprise of 7.5%.
Steven Madden designs, sources, markets and sells fashion-forward name-brand and private-label footwear for women, men, and children, and private-label fashion handbags and accessories across the world. It has a Zacks Rank #2 (Buy) at present.
The Zacks Consensus Estimate for Steven Madden’s current fiscal-year earnings and sales indicates growth of 12.6% and 6.9%, respectively, from the year-ago period’s reported figures. SHOO has a trailing four-quarter average earnings surprise of 9.5%.
Kontoor Brands is an apparel company. The company currently carries a Zacks Rank #2. KTB has a trailing four-quarter average earnings surprise of 12.3%.
The Zacks Consensus Estimate for Kontoor Brands’ current fiscal-year sales and EPS indicate growth of 0.1% and 12.7%, respectively, from the year-ago period’s reported figures.