Investors were disappointed in the second-quarter earnings results for lululemon athletica (NASDAQ:LULU). The athletic apparel specialist posted strong sales results for the period despite customer traffic pressures tied to the coronavirus pandemic. But its earnings decline, plus a cautious outlook for the rest of 2020, had Wall Street focused on short-term risks.
CEO Calvin McDonald outlined those risks in a conference call with analysts while explaining why management is feeling confident that the worst of the pandemic's impact is behind the business. Let's look at some highlights from that discussion.
Our stores are small and designed to be an efficient use of space with high levels of traffic, which results in high productivity. While these are appealing attributes, the current capacity constraints understandably limit the number of guests who can be in the store at one time.
Lululemon is carefully managing traffic volumes to minimize the risk of coronavirus outbreaks. This strategy has stores operating at about 75% of their normal productivity level, and that's a big reason in-store sales dived 51% this quarter.
Executives aren't expecting any improvement in this customer traffic bottleneck at least through the rest of 2020 while COVID-19 remains uncontained in key markets like the U.S. But that doesn't mean they are any less bullish about having a robust store network that supports the company's online distribution.
Lululemon plans to add dozens of new locations this year, including over 70 seasonal shops during the next two quarters. "We continue to believe physical stores are and always will be an extremely important part of our ecosystem," McDonald said.
As our stores continue to recover, our e-commerce business has accelerated from a 41% comp in quarter four of last year to 157% comp in the current quarter. Similar to quarter one, we've seen a healthy mix of new guests, existing e-commerce guests, and historically retail-only guests now shopping with us online.
The e-commerce segment saved the day again for the business, with comparable-sales gains accelerating to 157% from 68% three months ago. Success was broad-based in this niche and included steady gross profit margins and spiking demand from traditionally underrepresented demographics like men.
The chain believes the digital channel will continue to be an outsize growth avenue even after the coronavirus threat ends, and so it is pouring resources into bulking it up in areas like fulfillment and IT infrastructure. "We pulled forward investments ... to ensure our guests continue to receive an elevated experience when shopping our sites," executive vice president Meghan Frank said.
A tricky holiday season ahead
It's important to note that our view on total revenue growth in the back half assumes no improvement to the 75% productivity levels we're currently experiencing in reopened stores.
Lululemon didn't issue a detailed growth outlook, but executives did make some general predictions about the next six months. Sales should continue inching higher, as they did in Q2, as the business leans more on the e-commerce channel while stores are operating at reduced capacities. Executives expect digital gains to slow from this past quarter's 157% spike now that its entire store base is open.
They still don't see a big concern with Lululemon's elevated inventory holdings and believe they can work through the buildup over the next few quarters. The outlook for this period is unusually cloudy, but the retailer is holding to its latest long-term growth strategy that calls for doubling its men's business and e-commerce segment while quadrupling its international footprint by the end of fiscal 2023.