Lululemon's Chinese mainland revenue grew 45% in the first quarter, and the new chief product officer has not yet been determined

"Since the beginning of the year, the stock price has fallen by about 40%."

Author: Soda

Editor: Tuya

Company intelligence expert "Financial Tuya" learned that on June 6, Beijing time, Lululemon (LULU: US) Group announced its Q1 results for 2024.

During the reporting period, the company's total revenue was $2.2 billion, up 10% year-over-year, and global comparable sales increased 6%. The increase in net income was mainly due to the increase in net income in Chinese mainland. The Americas remained the main source of revenue, with revenue of $1.6 billion in the quarter, up 3% year-over-year, and comparable sales flat. However, the share of total revenue declined, from 79% in the same period last year to 73%.

Revenue from Chinese mainland China was the highlight of growth, with its share of total revenue increasing to 14% in the quarter, up from 10% in the same period last year. Net income for the quarter was $303.8 million, up 45% year-over-year, with comparable sales up 26% and 33% in constant dollars. The rest of the world combined revenue of $282.8 million, accounting for 13% of total revenue, compared to 11% in the year-ago quarter. Revenue for the quarter was $223 million, up 27%, and comparable sales were up 23%.

Since the beginning of the year, Lululemon's stock price has fallen by about 40%. Before the release of the earnings report on June 5, local time, Lululemon's closing price was $308.27, a slight increase of 0.49% from the opening price. However, the stock price rose sharply after hours, and the highest point once soared to $347.6, up 15.2% from the opening price.

During the period, the company's operating income was US$432.6 million, accounting for 19.6% of net revenue, compared to operating income of US$401.4 million, or approximately 20.1% of net revenue, in the first quarter of 2023; Net income was $321.4 million, or $2.54 per diluted share, compared to $2.28 per diluted share in the first quarter of 2023, with same-store sales up approximately 6% and closing inventory down 15%.

At the end of the first quarter of 2024, the company had cash and cash equivalents of $1.9 billion. The company's management revealed in the conference call that the company has repurchased $300 million in shares in the first quarter of this year, continued to repurchase $230 million in the second quarter, and recently the board of directors has agreed to authorize an additional $1 billion share repurchase program.

The departure of the chief product officer has caused the stock price to plummet

At the end of the first quarter, Lululemon had a total of 711 stores in operation, compared to 662 in the same period last year, with 49 new stores. Only two new stores were added in the Americas, and two stores were closed in the rest of the world, but 47 new stores were added at the same time. Meghan Frank, the company's chief financial officer, said on a conference call that it expects to open 14 new stores in the second quarter.

According to the report, the company's gross profit for the quarter was $1.3 billion, with a gross margin of about 57.7%, compared to $1.2 billion in the same period last year, accounting for 5.75% of net income, an increase of 20 basis points. The increase in gross margin was primarily due to a net increase of 120 basis points in product margin, including lower product costs, freight and inventory provisions, partially offset by higher price reductions during the year.

It is worth noting that before the release of the earnings report, Sun Choe, Lululemon's long-term chief product officer, announced his departure on May 22 local time. According to information disclosed by VF Group, Sun Choe will take on the role of global president of the Vans brand in late July.

Sun Choe has been recognized on Wall Street for seven years at Lululemon. After the news of his departure was announced, Lululemon's stock price fell about 7%. Some analysts believe that Choe's departure could mean that Lululemon's current product portfolio will take longer than expected to make a quick correction in size or color.

Lululemon CEO Calvin McDonald also spoke about the matter during the call, saying that he understands Choe's career goals and personal choices, "We have been in regular communication recently." However, a new CEO has not yet been chosen, and Calvin admits that he will "update the succession plan on a regular basis, which will allow the company to move seamlessly into the new leadership structure plan". At the same time, the revision plan for the product was not affected.

He also mentioned that Jonathan Cheung, the company's global creative director, reports directly to him, and that the entire product team will continue to drive innovation, design and technology product advancements. According to the news, in January this year, lululemon announced the appointment of Jonathan Cheung as the global creative director, responsible for leading the company's global design team to develop a global creative strategy, and Jonathan reported directly to Sun Choe, chief product officer.

At the end of the second quarter and the second half of this year, the company will bring significant innovations in terms of products. In the women's business, the company plans to launch some "exciting" new products in the leggings range, including a new performance fabric expected to be launched by the end of the year, one of the fastest-drying and lightest-weight fabrics to date.

The Chinese market is still in the early stages of growth

Talking about the international business, Calvin admitted that the company had a slow start to the year due to several internal factors that had previously missed out on some opportunities in the women's clothing and bags space, and that the company is actively responding to these issues and fluctuations in the consumer environment. In the long term, "I think there's still a chance for a further 5 percent growth in the international business." At present, the international business is only 21% of the total business, and the penetration rate is far from enough. Calvin said.

Management expressed "very satisfaction" with the results of the Chinese mainland market in the first quarter. Going forward, the company will be closely monitoring changes in the environment, but overall, "we are still in the early stages of our growth journey in China, so we have nothing to worry about."

According to the report, the net income growth in Chinese mainland in the first quarter was also affected by the company's new or expanded stores and other channel revenue, with overall revenue increasing by US$41.7 million, while the increase in operating income was mainly due to an increase in gross profit (US$61.3 million). So far in the first quarter of 2023, Lululemon has opened 26 new stores in China, compared to just nine in the rest of the world.

"We saw phenomenal growth in the Chinese mainland market during the quarter. At the same time, growth in the rest of the world is very strong, and from a positioning perspective, we don't see anything comparable to us at the moment, and we know where the opportunity lies. Management said.

According to the information disclosed in the financial report, as of April 28, 2024, Lululemon has 127 stores in operation in Chinese mainland, ranking second in the world. The first place is the United States, with a total of 369. The number of stores in the Asia-Pacific region excluding Chinese mainland is only 97.

Calvin mentioned that the U.S. market plan remains unchanged, where "the opportunity lies in the male business, and many of the innovative launches have resonated with a lot".

According to the report, the men's business maintained strong growth in the quarter, mainly due to the impact of the VIP lounge and the ABC franchise, and Lululemon will continue to expand the reach of these two advantages later this year. "At present, the market share of this segment of the business accounts for less than 20% of the overall independent brand market in the United States, and there is still huge growth potential."

Management revealed that the storefront plan for the U.S. market is closely related to local real estate. Sales per square foot across Lululemon's U.S. stores are currently significantly higher than average, but "the real growth may be in the digital channels." In the next few years, we believe that the online channel in all markets around the world will achieve 40% growth as a support and driver for offline stores. ”