Revenue Radar: Lululemon's US growth stalls

Lululemon athletica inc., the premium athletic apparel retailer known for its yoga-inspired clothing, has delivered a mixed third quarter performance that highlights both the company’s international opportunity and domestic challenges.

On December 5, 2024, the company reported a 9% increase in revenue to $2.4 billion, while posting a concerning 2% decrease in comparable sales across its Americas segment, which represents 74% of total revenue. This divergence between international expansion and home market performance comes as the Vancouver-based company continues to execute its ambitious Power of Three ×2 growth strategy targeting $12.5 billion in revenue by 2026.

“Our performance in the third quarter shows the enduring strength of lululemon globally, as we saw continued momentum across our international markets and in Canada,”  stated CEO Calvin McDonald.

“Looking to the future, we are pleased with the start to our holiday season, and we remain focused on accelerating our U.S. business and growing our brand awareness around the world.”

Key financial metrics

• Revenue: $2.4 billion (+9% year-over-year)
• Comparable sales: +4% (+3% on constant dollar basis)
• Operating income: $490.7 million (+45%)
• Operating margin: 20.5% (+520 basis points)
• Gross margin: 58.5% (+150 basis points)
• Diluted earnings per share: $2.87 (vs $1.96 in Q3 2023)
• Free cash position: $1.2 billion
• Inventory: $1.8 billion (+8% year-over-year)

The company’s financial performance prompted the Board of Directors to authorize a $1.0 billion increase to its stock repurchase program, demonstrating confidence in the business despite mixed regional results.

CFO Meghan Frank highlighted that the results “exceeded our expectations,” while emphasising the company’s focus on “deepening engagement with our guests and bringing new consumers into the brand.”

“Our third quarter results, which exceeded our expectations, demonstrate the ability of our teams to be agile in a dynamic operating environment. With the majority of the fourth quarter still in front of us, we are focused on deepening engagement with our guests and bringing new consumers into the brand. We are committed to delivering on our Power of Three ×2 revenue target of $12.5 billion in 2026 and look forward to all that lies ahead.” – Meghan Frank, CFO.

Regional performance

Lululemon’s Q3 results paint a contrasting picture across its key markets. The Americas segment, which accounts for 74% of total revenue at $1.8 billion, saw modest growth of 2% but experienced a concerning 2% decline in comparable sales. This marks a shift in momentum for the company’s core market.

In stark contrast, the company’s international business demonstrated exceptional strength. China Mainland revenue surged 39% (36% on a constant dollar basis), with comparable sales increasing 27%. The Rest of World segment also showed robust performance, with revenue climbing 27% (23% on a constant dollar basis) and comparable sales up 23%.

The company continued its retail expansion, adding 28 new company-operated stores during the quarter, bringing its total store count to 749. This included 14 stores from the strategic acquisition of Mexican operations, demonstrating Lululemon’s commitment to expanding its global footprint despite domestic headwinds.

Strategic focus

Lululemon continues to execute its Power of Three ×2 growth strategy, targeting $12.5 billion in revenue by 2026. This ambition comes as the company navigates contrasting regional performance, with strong international momentum counterbalancing slower growth in the Americas.

The company’s strategic initiatives are supported by continued retail expansion, having added 28 new company-operated stores during the quarter, including 14 locations from the strategic acquisition of Mexican operations. This brings the total store count to 749, demonstrating Lululemon’s commitment to physical retail growth despite the evolving retail landscape.

In a show of confidence in its strategic direction, the company’s Board of Directors has authorized a $1.0 billion increase to its stock repurchase program. Including this increase, as of December 5, 2024, the company had approximately $1.8 billion remaining authorized on its stock repurchase program.

Market outlook

Lululemon’s mixed regional performance comes amid shifting dynamics in the global athletic apparel market.

Looking ahead to Q4 2024, the company has provided specific guidance, expecting net revenue to be in the range of $3.475 billion to $3.510 billion, representing growth of 8% to 10%, or 3% to 4% excluding the 53rd week of 2024. For the full fiscal year 2024, Lululemon now expects net revenue to be in the range of $10.452 billion to $10.487 billion.

The company’s inventory position increased 8% to $1.8 billion compared to the prior year, a metric that will be closely watched given the broader retail environment and the importance of the upcoming holiday season. The guidance assumes a tax rate of approximately 29.5% for the fourth quarter, with management noting that this outlook does not reflect potential future repurchases of the company’s shares.

Is the future Lululemon?

As Lululemon moves forward, the company faces both clear opportunities and challenges. While international growth remains robust, particularly in China, the task of reinvigorating growth in its core Americas market will be crucial to achieving its ambitious Power of Three ×2 revenue target of $12.5 billion by 2026.

For the fourth quarter of 2024, the company has set clear expectations, forecasting net revenue between $3.475 billion and $3.510 billion, representing growth of 8% to 10%. This projection adjusts to 3% to 4% growth when excluding the additional 53rd week in fiscal 2024. For the full fiscal year 2024, Lululemon has updated its revenue outlook to between $10.452 billion and $10.487 billion.

The company’s strong balance sheet, with $1.2 billion in cash and cash equivalents, combined with the newly expanded $1.8 billion stock repurchase authorization, provides significant flexibility as it navigates the evolving retail landscape.

However, the success of Lululemon’s growth strategy will largely depend on its ability to maintain international momentum while successfully addressing the headwinds in its largest market.

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