3 Key Things From Lululemon's Earnings Call That Investors Should Know

Lululemon Athletica (LULU 1.31%) stock dropped 15.8% on Friday, following the activewear retailer's release on the prior afternoon of its report for the fourth quarter of fiscal 2023, which ended Jan. 28.

The quarter's results were strong and better than Wall Street had expected. It was management's guidance -- particularly for the first quarter of fiscal 2024 -- that spurred the stock sell-off. The full-year guidance was just a bit lighter than analysts had expected, but the Q1 guidance was notably lower than the consensus estimates, especially for earnings.

For fiscal Q4 2023, revenue grew 16% and adjusted earnings per share (EPS) jumped 20% year over year. For fiscal Q1 2024, management guided for year-over-year revenue growth of 9% to 10%, and adjusted EPS growth of 3% to 5%. For the full fiscal year, management expects the top line to increase 11% to 12%, and the bottom line to grow 10% to 11% year over year.

Earnings releases tell only part of the story. Following are three key things from the company's fiscal Q4 2023 earnings call that investors should know.

1. Why Q1 guidance came in lower than widely expected

From CEO Calvin McDonald's remarks:

Let me now speak to quarter 1 of [fiscal] 2024 and what we're seeing in the business. We are pleased that our sales remain strong in most regions across the globe. Consistent with what we've seen from others in the market, the consumer environment in the United States has been somewhat challenging.

As I wrote in my article about the company's Q4 earnings, U.S. consumers "have been cutting back their spending on apparel and other discretionary products in part because of uncertainties about the macroeconomic environment." Moreover, since the pandemic subsided, they've "been shifting their disposable income spending more toward services and experiences."

The above explanation addresses the main reasons for Lululemon's somewhat lower-than-expected revenue guidance for Q1. As for the quarter's considerably lighter-than-anticipated earnings guidance, that's due in part to a couple of factors. The first is the moderately softer-than-expected revenue guidance stemming from the challenging U.S. market.

Second, as CFO Meghan Frank explained, the company plans "increased investments [spending] to grow brand awareness and acquire new guests" and it will have "higher depreciation resulting from technology investments made in 2022 and 2023." Depreciation is a non-cash expense that lowers a company's net income.

2. The international business has a particularly long runway for growth

From McDonald's remarks:

International, which includes our China Mainland and rest of world segments, continues to be underpenetrated and represents only 21% of our business. We operate a total of 273 stores in all our international markets combined, which clearly speaks to the opportunity we have ahead of us.

For context, in Q4, Lululemon's revenue growth by region was 9% in the Americas (formerly called North America), and 54% in international (78% in China Mainland and 36% in rest of world).

The current softness in the U.S. market aside, it makes sense that the company's international business is growing faster than its Americas business because the latter region is more mature.

Lululemon still has much room for growth in the Americas business through continued innovation and increasing brand awareness. And since its men's business is newer than its women's business and its footwear business is very new, these categories have particularly strong growth potential.

The company's growth potential in its international business is even greater, as McDonald pointed out with the statistic that only 21% of the company's revenue is generated from international markets.

In fiscal 2024, Lululemon plans to open 35 to 40 net new company-operated stores, and about 30 of them will be in its international markets, primarily in China, CFO Frank said.

3. Huge opportunity to drive growth by increasing brand awareness

From McDonald's remarks:

[O]ur brand awareness remains low across most markets, which represents a significant opportunity for us to attract new guests. ... We are excited that our strategies to build brand awareness are working. Over the past year, through our strategic investments in brand campaigns and community activations [events of various types], we have successfully grown our unaided awareness in key markets. The U.S. went from 25% to 31%, and China went from 9% to 14%.

Unaided brand awareness is the percentage of consumers in a survey who are aware of a brand without being assisted.

That Lululemon's unaided brand awareness is low in the U.S. and extremely low in most international markets means that it has a massive growth opportunity. McDonald noted that in fiscal 2024, the company will continue to use the strategies to increase brand awareness that have been working for it over the last year.