A soft start to Q1 (Apr) in the U.S. as consumers grappled with tightened budgets amid inflationary pressures made investors uneasy when lululemon athletica (LULU, Financial) warned of troubling developments last quarter. The bearish outlook caused a rapid pullback, pushing shares 35% lower over the next two months.
Given this backdrop, investors were not expecting impressive Q1 numbers. However, the market likely hoped to see demand stabilize. Despite projecting bearish Q2 (Jul) figures, LULU's reiterated FY25 (Jan) revenue outlook and raised earnings forecast suggested that demand conditions are not expected to worsen further. Additionally, LULU's $1.0 billion increase to its share buyback plan reflects confidence in future cash flows.
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In the U.S., sales inched just 2% higher year-over-year, trailing LULU's overall revenue growth of 10% (11% in constant currency) to $2.21 billion in the quarter. The tepid growth in the U.S. was outshined by other regions:
- China soared by 52%
- The Rest of the World jumped by 30%
- Canada, LULU's home market, moved 12% higher (all in constant currency)
- On a same-store sales basis, the Americas, including the U.S. and Canada, were flat. International comps increased by 25%, helping pull total comps 6% higher in Q1.
- External challenges in Q1 included inflation, interest rates, and dampened consumer sentiment. Internally, LULU missed opportunities in women's apparel and bags, offering stale colors and assortments and being out of stock in some smaller women's sizes.
- LULU is actively working to fix its internal issues, ensuring a more optimal inventory position during the back half of the year. However, LULU anticipates Q2 results will suffer due to Q1's problems carrying over, projecting EPS of $2.92-2.97 and revenues of $2.40-2.42 billion, both below consensus.
- By the end of next quarter, management is confident its new assortment can reignite consumer demand, pointing to new launches planned within its women's categories that underperformed in Q1. Consequently, LULU kept its FY25 revenue guidance unchanged, targeting $10.7-10.8 billion. Meanwhile, LULU lifted its FY25 EPS outlook to $14.27-14.47, up $0.27 from its previous forecast, supported by markdown activity and flat airfreight costs year-over-year.
LULU was up against a relatively low bar ahead of its Q1 numbers, making its decent earnings beat and unchanged FY25 revenue guidance sufficient to generate some buying activity today. However, the issues from Q1 have not yet been resolved, as evidenced by weak Q2 guidance. Heightened uncertainty continues to hang over LULU, which may not be fully cleared until after Q2 when management anticipates much of its internal troubles to be behind it.
