Lululemon Athletica ((LULU)) has held its Q1 earnings call. Read on for the main highlights of the call.
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Lululemon Athletica’s recent earnings call reflected a mixed sentiment, highlighting both positive developments and significant challenges. The company reported strong revenue growth in China, improved gross margins, and successful brand activations. However, challenges in the U.S. market and tariff impacts on margins, along with concerns about inventory levels and SG&A expenses, contributed to a cautious outlook for the upcoming quarter.
Revenue Growth Matches Guidance
Lululemon reported a 7% increase in total revenue, or 8% on a constant currency basis, reaching $2.4 billion for the first quarter. This growth met the high end of the company’s guidance range, showcasing its ability to achieve projected financial targets.
Gross Margin Improvement
The company’s gross margin improved by 60 basis points to 58.3%, driven by lower product costs, improved markdowns, and better fixed cost leverage. This improvement reflects Lululemon’s effective cost management strategies.
Strong Performance in China
China Mainland revenue saw a significant increase of 22% in constant currency. Despite a calendar shift due to the Chinese New Year impacting growth by about four percentage points, the region’s performance was a standout success for the quarter.
Successful Brand Activations
The ‘Summer of Align’ campaign successfully boosted brand awareness, with unaided brand awareness in the U.S. increasing from the mid-30s to 40%. This indicates effective marketing strategies and strong consumer engagement.
Continued Share Repurchases
Lululemon repurchased $430 million of stock, demonstrating strong balance sheet management and confidence in its long-term prospects. This move reflects the company’s commitment to returning value to shareholders.
U.S. Revenue Growth Challenges
Revenue growth in the U.S. was limited to 2%, reflecting cautious consumer behavior and intentional buying decisions. This highlights the challenges faced in the domestic market amidst a shifting economic landscape.
Tariff-Related Margin Pressure
The company anticipates a gross margin decrease of 110 basis points for the full year, mainly due to increased tariffs. Lululemon is actively working on mitigation strategies to address these pressures.
Higher Inventory Levels
Inventory levels increased by 23% in dollar terms and 16% in units, driven by higher average unit costs related to tariffs and foreign exchange. This rise in inventory levels is a point of concern for the company.
SG&A Deleveraging
SG&A expenses rose to 39.8% of net revenue, up from 38.1% last year, leading to an operating margin decrease to 18.5% from 19%. This indicates a need for more efficient cost management.
Q2 Margin Pressure
Guidance indicates a Q2 operating margin decrease of approximately 380 basis points due to increased occupancy costs, depreciation, higher tariffs, and foreign exchange impacts. This forecast suggests continued financial pressures in the near term.
Forward-Looking Guidance
Lululemon maintained its full-year revenue guidance, expecting a growth rate of 7% to 8%. Earnings per share for the quarter were $2.60, surpassing expectations. The company plans to open 40 to 45 new stores in 2025, focusing on international markets, particularly in China. Despite challenges, Lululemon remains optimistic about navigating headwinds through pricing adjustments and supply chain efficiencies.
In summary, Lululemon’s earnings call painted a picture of mixed sentiment, with strong international growth and brand activations countered by challenges in the U.S. market and tariff-related pressures. The company remains committed to its growth strategy, focusing on international expansion and product innovation to drive future success.