During its fiscal 2022 fourth quarter, ended Jan. 29, Lululemon's (LULU 3.70%) revenue surged 30% year over year to $2.8 billion. Comparable sales were up 27%. And management provided upbeat guidance for fiscal 2023, expecting sales to grow 15%. All of this sent the stock soaring following the positive news.
But there's one piece of information that shareholders probably missed from the athleisure pioneer's recent financials, and it might change your perspective about the leadership team. Let's take a closer look at what investors need to know about this top apparel stock.
NASDAQ: LULU
Key Data Points
Paying too much
While Lululemon's revenue showed an impressive gain, the company's net income in Q4 2022 of $119.8 million was down 72% from $434.5 million in the prior-year period. For a business like Lululemon that has increased its earnings at a remarkable clip over the past decade, this figure was a curveball for shareholders.
"As we mentioned in our press release, we are taking an impairment charge related to assets and goodwill associated with Mirror," CEO Calvin McDonald mentioned on the Q4 2022 earnings call. As you can see, Lululemon recorded an impairment of goodwill charge of $408 million related to its Lululemon Studio segment, formerly called Mirror, which directly impacts profits. Excluding this hit, net income would've totaled $562.5 million, good for a 29.5% year-over-year jump.
Forcing management's hand to run an impairment test was weaker-than-expected hardware sales for Mirror. The business then came to the conclusion that the carrying value of the assets related to Mirror were worth substantially less.
Lululemon announced in June 2020 that it was buying Mirror for $500 million, so this massive write-down shows investors that management admits it severely overpaid for the innovative fitness start-up. At that time, Peloton Interactive was getting all the attention, as its stock price had soared thanks to the onset of the coronavirus pandemic. People were stuck at home and needed ways to work out. And it looks like Lululemon was trying to capitalize on this trend. But as we've seen, Peloton's share price has crashed over the past couple years, as it faces slowing demand.
To be clear, Mirror, now rebranded as Lululemon Studio, isn't going away. In addition to selling hardware and the subscription that these customers get, which includes perks like discounted apparel and access to classes and other events, the company will offer a lower-cost app-based subscription tier for access to the digital workout library. That's slated to be released this summer. With this, Lululemon is trying to expand its reach and drive customers to buy more of its products.
Investors should be mindful
There's no doubt that Lululemon's main business continues to fire on all cylinders. The company showed no signs of slowing down during the pandemic or more recently, with soaring inflation and heightened economic uncertainty. This is something investors should prioritize when looking for stocks to add to their portfolios. If they can navigate turbulent and uncertain times, it's a good indication that they can continue doing so in the future.
However, looking ahead, shareholders must be extremely mindful of management's capital allocation policies. Successfully completing an acquisition, by finding the right target company at the right price and by integrating its operations into the parent's, is always a difficult task. There are a ton of moving pieces, and normally a business simply overpays, like what Lululemon did.
That's why shareholders should've been skeptical when Lululemon announced it was buying Mirror almost three years ago, despite strategic rationale that might have sounded good at the time. But even after the impairment charge, Lululemon is in sound financial shape, with $1.2 billion of cash and cash equivalents on the balance sheet with zero debt. Therefore, I see no reason shareholders would want to sell their holdings.
