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Lululemon earnings 'an excellent report by all measures': Analyst

Janet Joseph Kloppenburg of JJK Research Associates breaks down Lululemon earnings and the outlook for the apparel company.

Video Transcript


- All right, let's talk a little bit more about Lululemon because shares are rallying here after hours. The stock up just around 7.5%, a beat here on both the top and bottom line. The company also raising its full year guidance. For a closer look at these results, we want to bring in Janet Joseph Kloppenburg of JJK Research Associates. Janet, it's great to see you. Certainly, first glance here at these numbers, a very strong report from Lululemon, but give us your take.

JANET JOSEPH KLOPPENBURG: Well, an excellent report by all measures. There's been a lot of skepticism because, as we know across the industry, June saw a slowdown, July saw a slowdown, and mixed outlooks on August. So the company reported sales well above expectations and beat from its 187 guidance by about $0.40. So the operating margin was actually up in the quarter, was expected to be down. Gross margin was down about 160 versus guidance for down 200. And of course, the sales beat took SG&A from flat guidance to up and gave such great, great leverage.

Looking forward, not only did the company pass through their upside, but they guided 3Q to much better than expected levels, about $1.90, $1.95 versus expectations of $1.78, again, with a sales beat, the outlook for sales to be better than we had thought. So clearly it doesn't look like they've experienced a slowdown in sales. I think on a three-year [? cabler ?] sales accelerated in the second quarter from the first quarter, which was about 27%.

So it all looks really good to me. I think skeptics will point to the inventory, which was up 85%. That's versus first quarter up 75. On a unit basis verses 19, units were up about 38%. And they were up about 36% at the end of the first quarter. So very much in line. And I will tell you, very much in line with guidance that they gave us, that it would be up more than the first quarter, but it would be close on a three year category unit basis.

So all in all, it looks like a very healthy quarter and a very healthy outlook.

- Yeah, Janet, I'm curious to hear a little bit more about this inventory build. You mentioned 15% increase quarter over quarter, 1.46 billion. Do you think Lululemon is going to be forced to discount maybe some more products here in the second half? And how significantly could that potentially weigh on Lululemon's margin?

JANET JOSEPH KLOPPENBURG: Well, the company is guiding revenue to be up somewhere over 25%. And they've got unit inventory up about 36% against very lean inventories last year. So if we think that the units are up close, close, still over, but close, to what the revenue numbers should be, it's a pretty comfortable number for me, and again very much in line with guidance and comparable to the sales numbers that they're giving us.

So I actually think that having the unit levels up versus being down dramatically last year is helping to fuel the top line because last year, they were suffering from a great deal of out of stocks because of supply chain constraints. So we're actually pretty happy with the inventory numbers. And also, I would say, that gross margin in the second quarter was better than expected down, reflecting freight up at least 150 basis points. But my guess is that merch margins were close to last year.

So right now, given the sales increases, I'm not really worried about any kind of markdown pressure in the back half of the year. It's clear from the second quarter numbers and from the guidance, which is above expectations both on the third and the fourth meaningfully, that the company is not worried about margin pressure right now. We'll learn more on the call, but it doesn't sound like they are experiencing any promotional pressure.

- So Janet, why do you think Lululemon is able to weather some of these macroeconomic and supply chain issues better than other retailers?

JANET JOSEPH KLOPPENBURG: I think as you know, last year, the company acquired many, many new customers as consumers really were starting to focus more on wellness and on active lifestyles. And as a matter of fact, in the first quarter, the company's store productivity levels were starting to trend higher than pre-pandemic levels while the digital business was up double digits. Clearly, they gain market share during the pandemic.

And because of innovation and because of broad brush [AUDIO OUT] across international markets, they are expanding close to 20% this year. They are clearly gaining market share. I think they've got a core millennial customer. And I also think that they really targeted that Gen Z customer. And they're winning with that customer as well. So the innovation, their international expansion, and I would also add, that they've introduced many new categories, including footwear, and hike, and golf, and tennis. And I think that brings a new customer into the mix as well.

They've also have price increases across about 10% of their assortment. I'm sure that's helping to some extent.

- All right, we'll have to leave it there, but a big thank you, Janet Kloppenburg. Thank you for joining us this afternoon.