Lululemon's third-quarter sales, profit exceed expectations

Sales in the nine-months ended November 1 were up 3.5% over last year

lululemon by chung
Lululemon's red logo matches fall colours at an office building in Vancouver | Chung Chow

What happened: Lululemon Athletica Inc. (Nasdaq:LULU) – B.C.'s fourth-largest public company, ranked by revenue – is showing remarkable resilience as the COVID-19 pandemic ravages the retail sector, and particularly companies that sell clothing.

Why it matters: The company is a large employer in the province, so its success helps the B.C. economy. Its success also hints at global fashion trends, such as demand for casual, comfortable clothing.

Demand for casual clothing, as a greater share of the population works from home, has created a sales boom at Vancouver-based retailer Lululemon Athletica Inc. (Nasdaq:LULU), which released its third quarter earnings  December 10, after the bell. 

Quarterly sales and profit in the quarter that ended November 1 exceeded analysts' expectations. Revenue jumped 22% to US$1.12 billion, while analysts had been expecting US$1.02 billion. Profit rose 14% to US$143.6 million, which, on an adjusted earnings-per-share basis, was US$1.16, compared to the US$0.88 that analysts had expected. 

CEO Calvin McDonald later told analysts on a conference call that the results "exceeded our expectations."

One analyst, who sent a statement to BIV agreed. Retail analyst and GlobalData managing director Neil Saunders said he thought the company's results were a "stunning" bounce-back, given its weak start to the year.

"Lululemon is operating in one of the few parts of the apparel market that is currently growing, and this has undoubtedly aided the swift recovery," Saunders said.

"Overall spend on athleisure in the U.S. increased by 13.4% during the quarter. So, Lululemon’s 19% growth within the States is well above average, which underlines that the brand is outperforming and taking market share."

It was international transactions that helped Lululemon even more on a percentage basis. Sales outside North America soared 45% in the quarter, compared with the same quarter last year, while North American sales were up 19%, compared with the same period in 2019, McDonald said. Exact dollar amounts for international sales were not in Lululemon's initial earnings filing. 

McDonald sounded bullish on future international growth, and he reiterated his October 30 announcement that he has hired a new executive vice-president for the company's international division: Andre Maestrini, who will start in January. 

Maestrini's task, McDonald said, is to quadruple the company's 2018 international sales by 2023.

BIV in October 2018 examined how international expansion was key to Lululemon's success, and spoke with founder Chip Wilson about his original expansion strategy and what some glitches were along the way. To read that article, click here.

McDonald said that he has high expectations for his company's North American prospects, and for sales to both men and women. 

"We're really happy with the progression we've seen [in men's clothing sales] through Q1, Q2, through to Q3. Moving from Q2 to Q3, the men's business accelerated almost at the same rate as women's. So, although it's slightly behind our women's growth, it has in fact accelerated faster from the Q1 impact from COVID."

Lululemon's new president, Celeste Burgoyne, who was appointed on October 30, joined McDonald on the call, and she attributed the company's recent success in part on investments in what she called the "omni guest experience," or digital channels in addition to physical stores.

"This served us very well in the COVID-19 environment," Burgoyne said. 

"We know that guest behavior is dynamic, and our goal is to create opportunities in both the physical and the digital world that offer compelling experiences. We have leveraged our channels, put the guest at the center of all we do and have enhanced the ways we engage with our guests."

One statistic, which newly appointed CFO Meghan Frank discussed on the call, showed the significance of Lululemon's e-commerce growth. Direct-to-consumer sales were 42.8% of the company's total revenue in the third quarter. That compares with only 26.9% of total revenue in the same period in 2019.

"We continue to see notable strength in traffic and conversion," she said. "Traffic was driven by channel shift, coupled with investments in digital marketing, and conversion continues to benefit from guest response to our product and the investments we've made in our global digital platforms to improve guest experience."

Lululemon did not offer a full outlook for its 2020 fiscal year, as uncertainty continues thanks to the COVID-19 pandemic.

The company had 515 stores worldwide at the end of the quarter, up by nine from the 506 that it had at the beginning. 

Investors, however, were not immediately impressed with the news, as Lululemon's shares fell more than 1%, to US$365.18 after hours, after rising 1.52%, to US$369.07, in the regular session.