In its own words, Lululemon Athletica (LULU, Financial) admitted it hasn't maximized opportunities in the U.S. women's business, leading to missed Q2 sales and comparable sales expectations. After a stellar 2023, the company now forecasts lower Q3 revenue and reduced FY25 EPS and revenue. The market had already anticipated a tough earnings report, reflected in the stock's 16% drop since Q1 results on June 5. The focus is now on the company's recovery plan.
- Issues began this spring with an underwhelming product assortment lacking newness and being understocked in smaller sizes. CEO Calvin McDonald clarified that the issue isn't with Lululemon's innovation pipeline but with seasonal updates that offered too few new choices in colors, prints, and silhouettes, especially in the bottoms category.
- Compounding the problem, Lululemon pulled its "Breezethrough" leggings in late July after negative reviews. Although this didn't impact Q2 results, it was another setback for the company trying to convince shareholders of its innovation capabilities.
- Mr. McDonald reassured investors that a plan is in place to quickly rectify the situation. For 2025, Lululemon is fast-tracking new styles in performance, shorts, tops, and track suits categories. The company has also improved its in-stock inventory of smaller sizes through Q2 and is entering Q3 in a better position, expecting these initiatives to pay off by spring 2025.
- International business remains strong, with international revenue jumping 31% in constant currency, led by a 37% increase in mainland China due to its omnichannel strategy. Revenue in the Rest of World market grew by 27% in constant currency, with notable strength in EMEA and APAC.
- Conversely, the Americas business struggled, with comparable sales decreasing by 3% compared to a 22% increase internationally. Overall, comparable sales increased by 2%, missing analysts' expectations.
The key takeaway is that Lululemon's unforced errors have added challenges to an already tough business environment. However, these issues were known and factored into the stock ahead of the Q2 report. The focus now is on Lululemon's ability to resolve the newness issues. Given Lululemon's strong track record and brand strength, a rebound is likely sooner rather than later.
