Well, that didn't take long.
Three months after posting a revenue slump through the early days of the COVID-19 pandemic, lululemon athletica (LULU 1.17%) is growing again. The athletic apparel retailer just revealed a slight second-quarter sales increase even though most of its stores were closed to shopper traffic for several weeks in the period. The quick rebound was powered by robust digital demand that has management feeling good about the second half of the year, too.
Let's take a closer look.
The omnichannel difference
Lululemon saw cratering sales volume throughout its store base, as many locations were closed in June and July. Comparable-store sales plunged 51%.
Image source: Getty Images.
But the chain's booming online platform offset all of those declines. E-commerce sales soared 155% to account for 64% of sales compared to 54% in the fiscal first quarter. That success allowed overall revenue to rise by 2%. Most investors who follow the stock were expecting to see a 6% drop. For context, revenue fell 17% in the fiscal first quarter and the online segment expanded at a 68% clip.
"We're pleased with our overall business results," CEO Calvin McDonald said in a press release, "as lululemon increasingly lives into its Omni[channel retailing] potential."
Signs of struggles
It wasn't all good news in this report. Gross profit margin ticked down and adjusted operating profitability fell to 15% from 19% a year ago thanks to inefficiencies from the COVID-19 shutdowns. These trends reduced earnings, with net income falling to $87 million compared to $125 million last year.
LULU Operating Margin (TTM) data by YCharts. Data runs through fiscal Q1 of 2020.
Lululemon didn't report any major inventory writedowns like some of its peers -- including Nike -- have posted. But inventory could still pinch earnings over the next few quarters. The chain announced a 36% increase in its apparel holdings this quarter, easily outstripping the growth in sales.
Executives said back in June that they felt good about the quality of their inventory, and they reiterated that positive outlook this week. "We are cautiously optimistic with regard to the second half of the year as we continue to navigate the uncertain environment," McDonald said.
Never the same
Management didn't issue any short-term operating forecasts thanks to the volatile selling environment that includes risks around economic growth and further COVID-19 outbreaks. Executives did imply that a few of the pandemic-influenced consumer demand changes are likely to stick around.
Digital spending is at "an inflection point" for the wider industry, for one. As a result, investors might expect to see e-commerce stay at above half of Lululemon's wider business from here on out.
The big question for the rest of 2020 is whether the retailer can return to its past record of steady profitability expansion now that it is fulfilling most of its sales from the online niche. Its inventory pileup could make that goal harder to achieve through the holiday shopping season, especially if peers react to similar pressures by cutting prices for their athleisure merchandise.
