On Thursday, Lululemon Athletica (LULU 0.10%) reported strong results for its third quarter of fiscal 2021 (which ended Oct. 31). The athletic-apparel retailer's revenue jumped 30% year over year to $1.45 billion. Adjusted for one-time items, net income surged 40% to $211.3 million, or $1.62 per share. Both results exceeded Wall Street's expectations, with the profit beat sizable, as analysts had been looking for adjusted earnings per share of $1.41.
Despite the quarter's better-than-expected results and management raising its full-year guidance for both the top and bottom lines, shares edged down 1.8% the day after earnings were released. The main culprit for the small decline was probably management's lowering of its full-year sales outlook for Mirror, the home connected-fitness business that it acquired last year. Investors shouldn't be concerned because this is a new business for Lululemon and accounts for less than 3% of its total revenue.
Earnings releases tell only part of the story. Following are two key things from the company's Q3 earnings call that investors should know.
Image source: Getty Images.
1. Sales strength was broad-based
CEO Calvin McDonald said, "Our strength continues to be broad-based and balanced across every facet of our business, including channel, category, activity, gender, and geography."
The store and e-commerce channels grew revenue by 38% and 23%, respectively, compared to the year-ago period, with e-commerce sales accounting for about 40% of total revenue. The pandemic significantly affected the year-ago results by boosting online sales and hurting store sales. So looking at the two-year compound annual growth rate (CAGR) gives investors a better picture of the company's revenue growth performance. The two-year CAGR for the entire business is 26%, while that for the store and e-commerce channels is 10% and 54%, respectively.
McDonald said that momentum in the quarter remained robust across the company's major categories, with revenue in women's, men's, and accessories increasing 24%, 29%, and 40%, respectively, on a two-year CAGR basis.
Management didn't provide statistics on sales by activity. Lululemon focuses on yoga, running, working out (or training), golf, tennis, and hiking. It also offers casual and work clothes.
As to region, revenue rose 28% year over year in North America and 40% internationally. China has been a particularly bright spot.
2. Supply-chain issues haven't hurt the company as much as many competitors
From McDonald's remarks:
We continue to face the same issues as much of the industry, including port slowdowns and increased costs associated with airfreight. In Vietnam, I am pleased to share that all of our factories have reopened and continued to ramp up their capacity. While the summer closures caused some delays, our total inventory at the end of Q3 was up 22%, slightly ahead of our most recent expectations of 15% to 20%.
Apparel retailers and companies in many other industries have been grappling with pandemic-driven global supply-chain issues since the crisis began. Like many other companies, the congestion at ports has led Lululemon to increase its use of airfreight for deliveries of finished products made overseas. This increased use, combined with the rising cost of airfreight, has driven up its expenses. These supply-chain issues have also caused many companies to lose some sales because they don't have enough of certain products to meet demand.
Lululemon hasn't been hurt to the same degree as many companies in its broad industry from these worldwide supply-chain problems. One main reason is that about 40% of its inventory is comprised of core seasonless product, so timeliness in receiving these items from overseas isn't nearly as much of a concern as it is for seasonal items. In addition, McDonald attributes the fact that the company has well-established partnerships with its vendors for enabling it to "mitigate many of the current supply chain risks."
Let's quantify the effect of the supply-chain issues. Lululemon's fiscal Q3 gross margin was hurt by 230 basis points (2.3%) by the increased airfreight costs. Nonetheless, it still achieved an excellent gross margin of 57.2%. This compares to 56.1% in the year-ago period and 55.1% in the pre-pandemic period two years ago.
For the full year, management expects the higher airfreight expense to hurt its gross margin by 2% to 2.5%. Despite this increase relative to last year, it still expects its annual gross margin to expand 1% to 1.5%.
In short, Lululemon's broad-based strong demand for its products, an enviable gross margin, and some insulation from the full negative impact of the global supply-chain issues are several key reasons why its stock deserves at least a place on investors' watchlists.
