Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Total revenue increased by 7% or 8% in constant currency.
- Earnings per share increased by 18%, driven by strong gross margin.
- International revenue increased by 29% or 31% in constant currency, with significant growth in China Mainland and the Rest of World segment.
- Men's revenue grew by 11%, showcasing strong performance across the assortment.
- Lululemon repurchased $584 million of stock in Q2, demonstrating confidence in the business.
Negative Points
- Revenue in the US was flat, indicating a slowdown in the domestic market.
- Women's business experienced a slowdown due to reduced newness in core and seasonal styles.
- The company had to pause sales of the new Breeze Through product due to design issues, impacting innovation momentum.
- Guidance for the second half of the year remains cautious due to macroeconomic uncertainties and a shorter holiday shopping season.
- SG&A expenses showed only 20 basis points of leverage, below the guidance of 40 to 60 basis points, due to lower than expected top-line growth.
Q & A Highlights
Q: What do you see as the revenue growth algorithm in North America once the dust settles on the current issues?
A: We are still committed to our Power of Three x2 plan, which targets low double-digit growth in North America. While it's too soon to put a fine point on 2025, we expect to be up against easier comparisons next year. We are excited about the long-term growth opportunities, particularly in terms of brand awareness in the US. The new product organization structure will lead to more creative conversations and outcomes, which should help drive growth.
Q: Can you speak to your comfort with inventory on hand today exiting the quarter and any changes for the back half?
A: We came in with inventory down 14%, in line with expectations. We expect inventory to increase in the mid-teens in Q3 and at a similar growth rate or slightly higher as we end the year. We are pleased with our inventory levels and are adjusting the composition to include more newness. Markdowns were flat year-over-year in Q2, and we expect them to be relatively flat in Q3 and slightly under last year in Q4.
Q: How much of the revenue shortcoming in the quarter was due to your own mistakes versus macroeconomic factors?
A: The majority of the shortcoming is within our control, primarily due to product decisions that led to a gap in newness across color, print, and silhouettes in our US women's business. Traffic was positive, but conversion rates were impacted by fewer new options available to our female guests. The new teams are already in action to address these issues.
Q: Can you talk about how the quarter progressed by region and any comments on quarter-to-date performance?
A: The quarter started in line with Q1 trends but softened in June and July, with July being slightly better than June. We haven't provided regional breakdowns, but given the macroeconomic uncertainty, we feel our guidance of 6% to 7% growth for the second half is appropriate. Inventory levels are comfortable, and the impact of the Breeze Through product was negligible.
Q: Can you provide more perspective on China, given the strong growth rates there?
A: China Mainland revenue increased 37% in constant currency. The variance between Q1 and Q2 growth rates was primarily due to the shift in Chinese New Year. We remain excited about the potential in Mainland China, where our store base is still relatively small. We take a localized approach to brand building, which has been effective in driving awareness and engagement.
Q: How are you planning to manage the P&L to keep EBIT margins positive despite the slower near-term run rate in the US?
A: We are closely monitoring the business and running multiple scenarios. We are continuing to invest in international growth and brand awareness while looking for efficiency opportunities across the P&L. We remain committed to our Power of Three x2 plan, which includes modest operating margin expansion over the five-year period.
Q: Has your core customer in women's changed over the years, and how are you addressing any shifts in demographics?
A: We continue to acquire new guests across all age demographics. The shift in our sizing profile has been addressed, and we saw improvements through Q2. We are entering Q3 with a better mix of sizing and will continue to adjust as needed. There has been no significant macro shift in our customer base.
Q: Can you provide more details on the performance of core products and any headwinds related to inventory?
A: The gap in newness, particularly in color, print, and pattern, was more pronounced in Q2 than in Q1. This impacted conversion rates as guests were looking for new options. We are addressing this by increasing newness in our core styles and introducing new silhouettes. Our accessories business continues to perform well, with new styles and innovations driving growth.
Q: How are you planning to increase the level of newness in the women's assortment in the coming quarters?
A: We have an action plan in place to chase and fast-track designs to bring more newness into our women's assortment. This will sequentially get stronger through Q3 and Q4, with a return to historical levels of newness by Spring 2025. Our guidance for the second half does not include any meaningful impact from this newness.
Q: What are your thoughts on the competitive environment and its impact on gross margin and SG&A rates?
A: We continue to see strength in both gross margin and revenue growth. We are delivering gross margin relatively in line with 2023 and approximately flat SG&A, resulting in strong operating margins. We remain committed to our Power of Three x2 plan and are focused on driving both top-line and bottom-line growth while optimizing efficiencies across the P&L.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
