Lululemon: China's Growth Leads, U.S. Optimism Follows
Earnings Review Q3'24
Lululemon reported strong Q3’24 results, driving a positive market reaction with the stock up +9% in after-hours trading (and continuing to climb). The rally was fueled by a revenue and EPS beat, alongside an upward revision to FY24 guidance. Revenue is now expected to reach $10.452–$10.487 billion, reflecting 8%-10% growth (vs. 8%-9% previously), while EPS are projected at $14.12, representing a 10.5% increase compared to FY23.
Additionally, commentary during the earnings call on product innovation reassured investors that Lululemon, despite the departure of former Chief Product Officer Sun Choe in May 2024, is regaining its footing in the innovation space.
“As I step back and look at our entire product assortment, I'm excited with the newness we have planned. Our technical product is a key competitive advantage for us. And our positioning as a premium athletic brand offering high-style, high-performance product truly differentiates us from others.” Calvin McDonald, CEO
We hope you’ve been following our coverage of the company during this challenging year, starting with our April 2024 analysis, Lululemon: Is the Brand's Power Really Fading?, and our subsequent updates in the Premium Members’ chat, where we detailed our actions on the stock.
1. Key Financials
Net Revenue: $2.4 billion, an increase of 9%, accelerating from the prior quarter's 7% growth. Mainland China (13% of revenue) led the way with 39% growth, followed by Rest of World (13% of revenue) at 27% growth. Americas were nearly flat, growing just 2%.
Comparable Sales: Increased 3% on a constant currency basis, consistent with the prior quarter.
Gross Profit: Reached $1.4 billion, up 12%, with a gross margin of 58.5% versus 57% in Q3’23 (or 58.1% adjusted for last year's Lululemon Studio obsolescence charge). Margin improvement was driven by product margin gains, favorable FX, and leverage, partially offset by higher distribution costs.
Operating Profit: Benefiting from higher gross margin and sales leverage, operating profit surged 45% to $490.6 million, with an operating margin of 20.5% compared to 15.3% in Q3’23 (19.8% when adjusted for prior year's impairment charges). SG&A expenses grew 8%, driven by payroll and higher digital marketing costs.
Diluted EPS: $2.87, up 46% (13.4% adjusted).
Overall, solid results, with metrics trending in the right direction.
Source: Koyfin (20% off for StockOpine readers and 3 months free trial for annual premium members)
2. Segmental
Americas
Americas Performance: The Americas region remained under pressure as comparable sales declined by 2%, driven by lower conversion. However, higher dollar value per transaction and new/expanded stores contributed to a 2% total revenue increase, reaching net sales of $1.77 billion. Canada stood out with impressive 9% growth within the region.
Margins: Income from operations as a percentage of sales remained stable at 37% (vs. 36.8% in Q3’23), benefiting from SG&A leverage. Gross margin, however, was slightly lower due to deleverage in occupancy and distribution costs.
Product Team Changes: Improvements in the U.S. product team are beginning to show results, addressing prior struggles with newness. This progress positions the U.S. market for potential growth, particularly given unaided awareness is currently just 36%.
Membership Growth: Membership increased to 24 million, up from 20 million in the prior quarter, underscoring the brand's resilience and strength.
Commentary on Newness:
Calvin McDonald, CEO, highlighted
“I'm proud of how our leaders and teams pushed forward this quarter and how we have made meaningful progress in creating the product organization to drive our future success.