Lululemon lowered its outlook and posted its first negative revenue result in more than two years on Thursday after botching a much-anticipated product launch and seeing growth slow in the Americas.
The company now expects full-year net revenue to be between $10.38 billion and $10.48 billion, down from a previous range of $10.7 billion to $10.8 billion. Lululemon expects earnings per share to be in a range of $13.95 to $14.15, down from a previous guidance of $14.27 to $14.47.
Here's how the company fared in its fiscal second quarter compared with what Wall Street expected, according to a survey of analysts by LSEG, formerly known as Refinitiv:
- Earnings per share: $3.15 compared to the expected $2.93
- Revenue: 2.37 billion dollars compared to the expected $2.41 billion
Shares rose more than 2% in extended trading after initially falling.
The company's reported net income for the three-month period ended July 28 was $393 million, or $3.15 per share, compared with $342 million, or $2.68 per share, a year earlier.
Sales totaled $2.37 billion, up 7% from $2.21 billion a year earlier. Beyond total sales, Lululemon also missed expectations for comparable sales, which rose 2%, well below estimates of 5.9%, according to StreetAccount. Comparable sales in the Americas fell 3%.
The trend does not seem destined to improve in the current quarter. Lululemon said it expects sales to grow 6% to 7%, worse than the 9.2% growth analysts had expected, according to LSEG.
Lululemon's earnings forecasts, however, are roughly in line with what Wall Street had anticipated. The company said it expects third-quarter earnings per share to be between $2.68 and $2.73, versus estimates of $2.70, according to LSEG.
During the quarter, Lululemon recalled its Breezethrough leggings, launched in early July, after receiving a wave of complaints about the product's unflattering fit.
On a call with analysts, CEO Calvin McDonald talked about the launch of Breezethrough, saying it was an opportunity for the company to “test and learn.” He added that the company purchased a small amount of product for the launch.
“While customers were excited about the fabric, the design did not meet their expectations. Listening to our customers is critical to our identity and the growth of our brand, and we made the right decision to pause sales and look forward to reintroducing the fabric in the future,” McDonald said. “This decision had a negligible impact on our performance this quarter.”
The botched launch came after the company struggled with other self-inflicted problems with its assortment, including not carrying the colors and sizes its core customers wanted, which impacted sales in the U.S. During the quarter, sales grew just 1% in the Americas, the company's largest region.
On a call with analysts, McDonald acknowledged that Lululemon's women's business has slowed in the U.S. She said the company has determined that the “most significant factor” affecting the segment is a lack of new styles, which has hurt pant sales and the company's online business.
“The novelty we had worked well, but we didn't have enough to motivate her to buy,” he said.
McDonald insisted that the Lululemon brand “remains strong in the U.S. market” and said its men's business continues to grow.
“Customers are searching for our product, coming to our stores and visiting our e-commerce sites,” McDonald said.
Lululemon’s product challenges come after the departure of its longtime chief product officer, Sun Choe, who resigned in May to pursue another opportunity. At the time, the decision hurt Lululemon’s stock amid concerns that Choe’s move would hurt the company’s ability to innovate and continue to win over customers with new fashion models.
McDonald's said the company had a succession plan in place at the time of Choe's departure, and said the company's global creative director, Jonathan Cheung, would report directly to McDonald's and oversee product design and innovation.
The company also named Nikki Neuburger as its new chief brand and product activation officer, who will oversee merchandising, footwear and product operations. On Thursday, McDonald said he and Neuberger are “pleased” with the new structure, which puts design and merchandising on an “equal playing field” and “restores the healthy balance that should exist within a product organization.”
“The teams are working well together and are already in action,” McDonald said.
Like other retailers facing slowing demand, Lululemon appears to be focused on what is within its control: operations and efficiency. While the sales outlook during the quarter was tougher than expected, Lululemon's earnings were higher than anticipated.
According to StreetAccount, gross profit rose 9% to $1.4 billion, while gross margin increased 0.8 percentage points to 59.6%, better than the 57.7% expected by analysts. Operating margin and operating income also increased.
Sales rose 29% in Lululemon's international markets as the company looks to China for growth.
