Lululemon (LULU) is up more than 13% in Wednesday midday Trading. The Vancouver-based retailer reported healthy gains in its fourth quarter results after the close Tuesday.
“In the fourth quarter and full year 2022, we delivered strong results across the business driven by our innovative products, powerful guest experiences, and strategic market expansion. … As we enter 2023, we look forward to another year of strong momentum across the globe and delivering on our Power of Three ×2 growth plan,” stated CEO Calvin McDonald in its Q4 2022 press release.
I'll get into the Power of Three ×2 growth plan in a moment, but first, I want to say that outside Mirror, it’s hard not to like what’s happening at the Vancouver-based apparel brand.
Here’s why.
Nike and LULU Rule
According to Barchart.com’s stock screener, 12 consumer staples stocks from both the textile-apparel and shoes and related apparel industries 12 consumer staples stocks from both the textile-apparel and shoes and related apparel industries listed on the NYSE and Nasdaq with a market cap of $3 billion or higher.
Lululemon and Nike (NKE) are unquestionably the belles of this particular ball.
On March 21, Nike Reported Q4 2022 results that were better than analyst expectations. On the top line, it had sales of 12.4 billion, 14% higher than a year earlier and 900 million higher than the consensus estimate. On the bottom line, it had a 79-cent profit, 23 cents higher than analyst expectations.
Based on its fourth-quarter results, Nike raised its guidance for 2023.
As for Lululemon, its Q4 results were also strong.
On the top line, Lululemon had revenue of $2.77 billion, $77 higher than the Zacks Consensus Estimate, And 30% higher than Q4 2021. on the bottom line, it had adjusted earnings per share of $4.40, 15 cents higher than the Zacks Consensus Estimate and 30.6% higher than a year earlier.
It's important to note that its international revenue increased by 35% year-over-year, 600 basis points better than its sales in North America. That speaks to its growing popularity worldwide. For example, its revenue in China in 2022 accounted for 8.4% overall, while the rest of the world accounted for 7.5% overall. Nevertheless, North America remains the biggest sales generator, accounting for 84%.
However, if China’s economy gains traction in the quarters ahead, that will definitely increase.
Same-store sales, one of the key metrics for retailers, were outstanding in Q4, up 30%, excluding currency. In addition, traffic was up 30% at its stores, with a 45% increase in online sales.
Now I’ll get into its Power of Three ×2 growth plan.
If It Ain't Broke, Why Fix It?
Lululemon laid out its Power of Three growth plans in April 2019. They included doubling its men's revenue by 2023, doubling its digital revenue by 2023, and quadrupling its international revenue (outside the U.S. and Canada) by 2023.
The company hit its men's target by 2021, tripled its digital revenue between 2018 and 2021, and quadrupled its international revenue by 2022.
As a result, it introduced Power of Three x2 in April 2022.
First, it planned to double its men’s revenues between 2021 and 2026. It planned to double its digital revenues by 2026 and quadruple its international revenue between 2021 and 2026. Hence, the x2 moniker. In addition, it plans to double its revenue between 2021 and 2026 to $12.5 billion.
Lululemon finished 2022 with its brick-and-mortar business accounting for 54% of revenue and its digital revenue accounting for 46%. It opened 81 new stores in the past year, bringing its total to 655.
In fiscal 2023 it expects Revenue to be at least 9.3 billion, 15% higher than in 2022, with earnings per share of at least $11.50, higher than in 2022.
The company continues to work through a bloated inventory that rose by 50% in 2022. That was done to ensure its customers could get the products they wanted. It continues to expect inventories to moderate. In Q1 2023, it expects Q1 2023 inventory to grow by 30-35%.
“We do not drive our top line growth through discounts or promotions, and we have no intentions to do so,” McDonald said in its Q4 2022 conference call. “We run a full-price business with markdowns strategically used to clear seasonal and other select product, and this will remain our approach in the future.”
As a result, investors can expect its gross margins to increase in 2023.
The Bottom Line
The only fly in the ointment for Lululemon is its Mirror product. It took a $443 million impairment charge in the fourth quarter.
“The overall at-home fitness space remains challenged,” Yahoo Finance Executive Editor Brian Sozzi reported Lululemon CFO Meghan Frank’s conference call comments regarding the impairment. “Mirror hardware sales during the holiday season came in below expectations.”
As Sozzi points out, its Mirror purchase is now virtually worthless. It paid $500 million to the company that developed Mirror in June 2020. While it’s the only blemish in an otherwise stellar performance by Calvin McDonald in his nearly five years as CEO, there is a silver lining even if Mirror fails to resonate with customers.
In October 2022, it launched its two-tier membership program. One is called Essential. It is free. It provides members with “access to select content, as well as certain benefits in-store and online,” states the 10-K.
The second level is lululemon studio, formerly Mirror. It is a premium paid tier ($39 a month) providing its members with over 10,000 workouts, 10% of almost all LULU products, 20% fitness classes at its partner studios, free in-store classes, and early access to early access to events, and all the benefits of Essential.
It can leverage Mirror owners by pivoting away from the hardware while attracting non-owners to its paid tier.
One thing I’ve learned about LULU over the years is that it listens to its customers. It will be better from this expensive lesson.
Otherwise, it and Nike remain the belles of the ball.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
