Strong Performance Fuels lululemon’s Q3 Growth and Outlook

lululemon athletica inc. (LULU) announced impressive third-quarter fiscal 2024 results, with revenues and earnings surpassing the Zacks Consensus Estimate and showing improvement from the previous year. The company attributed this growth to its solid international performance and advances in the Americas market.

For the third quarter, lululemon reported earnings per share (EPS) of $2.87, up 13.4% from adjusted EPS of $2.53 in the same quarter last year. This exceeded the Zacks Consensus Estimate of $2.69.

Check the latest EPS estimates and surprises on Zacks Earnings Calendar.

The company continues to execute its Power of Three X2 growth strategy. Additionally, it raised its revenue and EPS forecasts for fiscal 2024.

After releasing strong Q3 results and adjusting its fiscal outlook, shares of lululemon rose 9.2% in after-hours trading. This Zacks Rank #3 (Hold) company has gained 50.9% over the last three months, outperforming the textile apparel industry, which saw a gain of 24.6% in the same period.

Image Source: Zacks Investment Research

Key Takeaways from LULU’s Q3 Earnings

Based in Vancouver, Canada, lululemon’s quarterly revenues increased by 8.7% year over year to reach $2.397 billion, surpassing the Zacks Consensus Estimate of $2.355 billion. Adjusted for constant dollars, net revenues rose 8% compared to the same period last year. Revenues in the Americas grew by 2%, while international sales soared by 33% (up 30% on a constant dollar basis).

Comparable sales (comps) grew by 4% year over year, with a 3% increase in constant dollars. However, comps in the Americas dipped by 2%, while international comps skyrocketed by 25% (22% on a constant dollar basis).

Total sales through physical stores rose by 13%, while digital revenues increased by 4%, accounting for 39% of total revenue.

The company’s gross profit saw a 9% rise, totaling $1.4 billion. The gross margin expanded by 40 basis points to 58.5%, driven by a product margin increase of 50 basis points, flat markdowns, a 20-basis-point deleverage on fixed costs, and a 10-basis-point positive impact from foreign exchange.

Management highlighted that gross margin growth exceeded prior guidance, which anticipated a decline of 50-60 basis points year over year. This better-than-expected performance was attributed to effective expense management and reduced distribution center costs. The expected contraction for the quarter was estimated to be 50 basis points to 57.6%.

Stock Price, Consensus, and EPS Surprise

lululemon athletica inc. price-consensus-eps-surprise-chart | lululemon athletica inc. Quote

Sales, General, and Administrative (SG&A) expenses rose by 8% year over year to $909.8 million. As a percentage of total revenues, SG&A expenses fell slightly to 38% from 38.2% last year, though this decline was less than anticipated due to foreign exchange impacts.

Operating income increased by 12.5% to $490.7 million, resulting in an operating margin of 20.5%, which is a 70-basis-point rise compared to the previous year. This contrasts with expectations that had predicted a more modest operating margin increase.

Plans for Store Expansion

During Q3, lululemon opened 28 company-operated stores, which included 14 that came with the acquisition of operations in Mexico. As of October 27, 2024, the company operated a total of 749 stores.

Looking to the fourth quarter of fiscal 2024, lululemon plans to open 18 new stores, including two in Mexico. For the year, the company anticipates adding 40 new locations (excluding Mexico) and completing 40 co-located optimizations. Without including Mexico, expected growth in store square footage is projected to be in the low double digits, while including Mexico would bring that to the low teens. The majority of new stores will be located in international markets, especially Mainland China.

Financial Position and Share Repurchase

At the end of the quarter, lululemon reported cash and cash equivalents totaling $1.2 billion, with an additional $393.5 million available under its revolving credit facility and stockholders’ equity of $3.99 billion. Inventory increased by 8% year over year to $1.8 billion, with capital expenditures for the quarter set at $178 million.

During the third quarter, lululemon repurchased 1.58 million shares for $408.5 million at an average price of $259. Year-to-date, the total amount spent on share repurchases reached $1.4 billion, with $1.8 billion left under the current authorization. This amount includes $1 billion in additional authority granted recently.

Looking Forward: Expectations for Q4 & FY24

As it approaches the fiscal fourth quarter, lululemon remains confident in its prospects, driven by a strong start to the holiday shopping season. However, the company acknowledges potential challenges from fewer shopping days between Thanksgiving and Christmas, along with ongoing economic uncertainties. The revenue and EPS forecasts for fiscal 2024 have been updated upward.

For Q4 of fiscal 2024, management expects net revenues to be between $3.475 billion and $3.51 billion, an increase of 8-10% year over year, or 3-4% excluding the impact of an additional week. This estimate factors in a $20 million negative hit from foreign exchange rates. The gross margin is projected to contract by 20-30 basis points, attributed to increased fixed costs and investments in store expansion and distribution operations. LULU anticipates a product margin increase of 60-70 basis points in Q4, with some cost increases in freight and improved markdowns.

SG&A expenses are expected to rise by 90-100 basis points year over year, reflecting higher foundational investments and related depreciation, indicating careful management of costs as the company scales its operations.