Lululemon’s first quarter-earnings report: Profit turnaround

The Vancouver-based apparel retailer’s net income reached USD$321 million in its first quarter (Lululemon reports in U.S. dollars), up from USD$290 million a year earlier. Its net revenue for the period ended April 28 amounted to USD$2.2 billion compared with about US$2 billion a year prior.

Lululemon earnings and profit despite economic pressures

The increases came despite higher inflation and interest rates, which have hampered consumers’ willingness to spend, and as the brand made some missteps in its womenswear and bag categories.

“When looking at women’s, we did not maximize the business in the U.S., which was the result of several missed opportunities, including a colour palette and our core assortment, particularly in leggings, that was too narrow,” said CEO of Lululemon Athletica, Calvin McDonald, on a call discussing the results. “Where we had colour, guests responded well. We just needed more as they are looking for additional choices, and we are also out of stock in some of our smaller sizes.”

Lululemon’s historical reporting

In prior quarters, McDonald said the retailer had noticed an increase in younger shoppers, which necessitated smaller sizes and a wider selection of colours that weren’t always on hand then either. McDonald feels Lululemon (LULU/TSX) is still well positioned to navigate such headwinds, particularly the demand for smaller sizes, which he said Wednesday was “within our control.”

Hole-in-one innovation to come later in 2024, along with competition

“We expect much of that to be addressed in the second half of this year,” he said, noting Lululemon has a wave of innovation planned for that portion of the year.

On top of the merchandising challenges, the brand is also seeing more retailers move into its territory. Los Angeles-based yoga apparel maker Alo deepened its Canadian presence recently, while rival Vuori, from San Diego, Calif., is rumoured to be interested in going public this year.

Neil Saunders, managing director of GlobalData Retail, considers the competitors Lululemon’s “biggest problem” because they are giving shoppers more choice. “The good news for Lululemon is that, from our data, very few American shoppers are abandoning it completely in favour of other brands,” he said in a note to investors. “They are simply sharing their spend on athleisure more widely.”

But Lululemon can’t get complacent, he said, recommending the company “double down” on its newer sporting categories like golf.

His suggestion came as the company said its international net revenue alone was up 35% from a year ago, while its net revenue attributable to the Americas rose by 3% over the same period.

Is Lululemon peaking?

Saunders considered the 3% “shallow” and said that was “the most disappointing and worrying aspect of Lululemon’s performance.” He continued: “It suggests that the company is reaching maturity in its core market, especially as it faces more competition from other brands.” But he said the company still started its fiscal year on a positive note, in part because its diluted earnings per share for Lululemon’s first quarter were USD$2.54, compared with USD$2.28 a year before.

Read more about company earnings:

• RBC earnings: A look at the bank’s Q2 financials
• Scotiabank Earnings: A breakdown of Q2 results for investors
• Canada Goose, Lightspeed report earnings
• Making sense of the markets

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