What happened
Shares of athletic apparel company Lululemon Athletica (LULU 1.74%) flew higher on Wednesday after it reported results for its fiscal 2022 fourth quarter. Those results were better than expected and guidance was strong, which is why Lululemon stock was up about 13% as of 1:04 p.m. ET.
So what
In the quarter, which ended Jan. 29, Lululemon generated revenue of $2.8 billion -- up 30% year over year -- whereas management had guided for revenue of $2.655 billion at best.
CEO Calvin McDonald was particularly upbeat about that growth because sales were down for the athletic apparel industry as a whole. "This is the highest quarterly market share gain we've achieved since we began tracking these numbers in 2020, and it caps a year in which we grew our market share every quarter," he said.
Adjusted diluted earnings per share (EPS) came in fine for Lululemon at $4.40. However, GAAP (generally accepted accounting principles) EPS took a big hit because of the company's $500 million purchase of connected-fitness company Mirror in 2020. The Mirror brand is struggling, and Lululemon's management wrote off $442.7 million relating to the acquisition in fiscal Q4.
Now what
Lululemon's acquisition of Mirror was supposed to fuel growth. The retailer's athletic apparel has passionate fans, many of whom weren't aware of Mirror and its subscription workout content. Therefore, it seemed like a match made in heaven. But Mirror is underperforming, and now management is pivoting to an app-centric subscription model. Hardware sales will take a backseat.
Lululemon's long-term guidance calls for revenue of $12.5 billion in 2026 compared to revenue of $8.1 billion in 2022. The good news today is that Mirror's underperformance hasn't changed management's targets -- it still believes they're achievable.
For 2023, Lululemon expects to generate revenue of at least $9.3 billion, or around 15% growth. For what it's worth, it will need to achieve a compound annual growth rate of about 12% to hit its 2026 revenue goal. Therefore, despite Mirror's lackluster performance, its 2023 guidance is well ahead of the requisite pace, which should be encouraging to shareholders.
