lululemon (Minutes): Lowered full-year profit guidance
$Lululemon(LULU.US) Lululemon (Minutes): Lowered Full-Year Profit Guidance
Below is the earnings call minutes for Lululemon FY25 Q1. For earnings analysis, please refer to Lululemon: "Black Pants" Collapse Again? High Valuation is the Original Sin!.
1. Key Earnings Highlights
1. Overall Performance:
(1) Total Revenue: $2.4 billion, up 7% year-over-year (YoY) (up 8% in constant currency).
(2) Comparable Sales: Growth of 1%.
(3) Earnings Per Share (EPS): 2.60(diluted),exceeding expectations and higher than Q1 FY24′s 2.54.
(4) Inventory: Inventory increased 23% in dollar terms (driven primarily by AUC growth related to tariffs and foreign exchange impacts); inventory increased 16% in unit terms.
(5) Share Repurchase: Repurchased 430 million worth of shares during the quarter (average repurchase price approximately 316), with approximately $1.1 billion remaining under the current authorization.
(6) Capital Expenditures (CapEx): $152 million (primarily to support business growth, distribution center projects, new store openings/relocations/remodels, and technology investments).
2. Performance by Channel:
(1) Stores: Revenue increased 8%. Ended the quarter with 770 global stores, a 14% increase in total selling square footage YoY (net new 59 stores YoY). Net opened 3 new stores and completed 4 store optimizations during the quarter.
(2) e-Commerce Channel: Revenue increased 6%, contributing $961 million (41% of total revenue).
3. Updated Full-Year FY25 Guidance:
(1) Gross Margin: Now expected to decline approximately 110 basis points (bps) YoY (previous guidance was down 60 bps). The incremental 50 bps decline is mainly due to tariffs (expected 30% incremental tariffs on China-sourced goods and 10% on other goods) and slightly elevated markdowns, partially offset by company-wide cost mitigation actions.
(2) Operating Margin: Expected to decline approximately 160 bps YoY due to tariff impacts (previous guidance was down 100 bps).
4. Q2 FY25 Guidance:
(1) Revenue: Expected to be in the range of 2.35billionto2.56 billion, representing 7% to 8% YoY growth.
(2) Gross Margin: Expected to decline approximately 200 bps YoY. Drivers: Elevated tariffs, slightly elevated markdowns, foreign exchange impact.
(3) SG&A Rate: Expected to de-leverage 170 to 190 bps YoY. Drivers: Increased infrastructure and related depreciation expense, strategic investments (e.g., brand awareness building), and the YoY base effect (lower SG&A expenses in Q2 FY24) leading to more pronounced seasonality for certain expenses (e.g., store payroll) impacting Q2.
(4) Operating Margin: Expected to decline approximately 380 bps YoY (primarily due to a combination of the high prior-year base in Q2 + the concentrated impact of external factors and current period investments; expected full-year decline is significantly smaller).
(5) Store Openings: Plan to open a net 14 new company-operated stores and complete 9 store optimizations.
2. Earnings Call Details
2.1 Management Highlights
- Regional Performance & Strategy: Plan to enter Italy via company-operated stores later this year, and enter Belgium and the Czech Republic via franchise partners.
- Brand & Marketing Campaigns:
- Launched the integrated "Summer of Align" campaign, leveraging traditional/social media, exclusive experiences, and ambassador partnerships (e.g., BottleRock music festival pop-up, 5,000-person yoga event in Beijing).
- The campaign significantly increased brand awareness, with US unaided brand awareness rising from the low-to-mid 30% range in Q4 to 40% in Q1.
2.2 Q&A
Q: Regarding the performance guidance for the remainder of the year and the pressures faced in the second quarter, what mitigation measures does the company have in place, such as price increases or diversified sourcing, and how should these be viewed? What are the category trends for new products in the US business, and how are the early sales of the new series performing?
A: For the full year, the company's guidance reflects a 160-basis-point decrease in profit margin compared to previous expectations, primarily related to the net impact of tariffs and a slight increase in discounts. To mitigate tariff impacts: First, on pricing, the company plans strategic price increases on a small percentage of products, with modest increases. Second, on sourcing, efficiency improvement measures are being implemented, some of which will take effect in the second half of this year, with ongoing efforts extending into 2026. Regarding new product category trends, introductions and updates are balanced across lifestyle and active categories. For lifestyle, the Daydrift pants launched in Q1 were well-received, selling out in nearly all stores, with restocked styles coming in September. For active, Loup received positive feedback, with sales continuing to grow, and the company is expanding its color and style options.
Q: Regarding drivers of revenue growth, last quarter mentioned a decline in store traffic but improvements in average unit price and conversion rate. What is the current situation, and what was the business progress in April-May?
A: From Q4 to Q1, store traffic declined, particularly in the US, although moderating. Traffic in Q1 was still lower than in Q4. Conversion rates were relatively stable but slightly down year-over-year (YoY). Average unit price rose in Q1. Regarding April-May progress, the company does not disclose specific Q2 details but stated there have been no material changes.
Q: Facing tariff impacts, why not rely more heavily on price increases for relief? Is the gap between the revenue and profit guidance primarily due to tariffs, or are there impacts from other investment expenditures?
A: The company maintains its full-year revenue guidance of 11.15 billion to 11.3 billion but has revised its full-year operating margin guidance from a decline of 100 basis points YoY to a decline of 160 basis points YoY. This adjustment is primarily driven by the net impact of tariffs. There are partial offsets from pricing and supply chain actions, alongside a slight increase in discounts. There are no significant changes to expenses.
Q: How did comparable store sales progress in Q1? How did Q2 begin? Does the Q2 revenue guidance of 7%-8% growth account for a potential slowdown in June and July relative to May trends?
A: There were no significant changes in monthly trends within Q1. For Q2, specific guidance isn't provided, but US trends are similar to Q1. China's Q1 was impacted by approximately 400 basis points due to the timing of the Chinese New Year. Current expectations and trends align with the full-year outlook for China performance, with growth expected in the 25%-30% range.
Q: Why is a slight increase in markdowns/promotions factored into the full-year outlook? What's the progress expected for Q2 versus the second half?
A: Promotions actually decreased in Q1 by 10 basis points. Results so far show no rise in promotions. However, considering consumer sentiment and macroeconomic concerns in the second half, the promotion forecast has been modestly increased, expected to be 10-20 basis points higher than last year. This increase is not significant compared to last year, which was consistent with historical levels. The Q2 promotional environment is already reflected in the guidance.
Q: What are the latest thoughts on restoring sustainable comparable store sales growth in the US business? When considering North American comparable store sales, are there differences between the Canadian and US markets?
A: New core products are performing well. The company is gaining market share in the premium active segment, outperforming peers. In the current US macro environment, consumers are more cautious and discriminating. While dissatisfied with the US growth rate, the company is pleased with gaining share and customer response to new products. Canadian consumers differ somewhat from US consumers; metrics like traffic haven't shown the same level of consumer discrimination as in the US. Both markets are responding well to new products. The team is monitoring customer reaction and will push innovations to market in the second half.
Q: On the product side, with comparable store sales growth only at 1%, which areas are lagging and need improvement? Why adopt a more cautious stance on promotions before actually seeing promotion levels rise?
A: In the US, overall traffic impacts the product mix. New customer acquisition grew. The company gained market share across categories, with both Average Order Value (AOV) and Units Per Transaction (UPT) showing positive trends, particularly in the premium segment. The lagging areas are primarily seasonal colors in core products, as customers gravitate towards newness. Regarding promotions, traffic trends serve as a leading indicator informing the cautious approach.
Q: Can you elaborate on inventory by region? Are specific regions facing greater margin pressure and markdown pressure? Where is this pressure originating – just the US or globally? From a promotion standpoint, is the competitive landscape intensifying in different global markets?
A: Thus far, no markdown pressure is evident. In terms of traffic headwinds and challenges, they are concentrated in the US. Entering the second half, there is potentially more markdown risk in the US. From a competitive perspective, outside the US, there's no price promotion activity globally. The US market consistently experiences promotions, and if macro headwinds persist, an increase in promotions is expected in the second half. The company is a full-price business and will focus on innovation and core lines but anticipates the US market will remain competitive.
Q: Given inventory and tariff situations, have procurement volumes been adjusted? Are procurement assumptions for the second half revised downward?
A: The company continually adjusts procurement volumes, with flexibility on approximately 40% of core product sourcing. No answer was provided regarding downward revisions.
Q: What is the overall level of product newness, and does it meet expectations? If newness fails to turn comparable store sales in the Americas positive, are other potential drivers being explored? Is positive comparable store sales growth achievable in the Americas this year?
A: Product mix newness has returned to historical percentage levels. Customers are responding positively to new core or expected core styles; the share of such styles in the newness mix will increase in the second half. The company did not provide specific guidance on comparable store sales for the year. Its view on full-year revenue in the Americas remains unchanged, expecting low to mid-single-digit growth. Should the consumer environment improve, the company is positioned to benefit.
Q: Given China's comparable store sales and the opening of many new stores, how much room for store growth remains in China before cannibalization of existing store sales becomes a concern? How many stores are there currently, what's the year-end target, and what is the future store growth rate?
A: China is still in the early stages of development. Current store count is 154. The current "Power of Three x2" plan targets approximately 200 stores, with significant growth potential beyond that. Performance of new stores is very satisfying, and there's an opportunity to expand store sizes to offer a more comprehensive product assortment.
Q: What are the traffic trends in the Chinese market?
A: Specific traffic trends weren't disclosed, but China continues to show strong double-digit growth with no notable anomalies.
Q: Within the 7% increase in inventory value (quantity to dollars), what are the respective contributions from tariffs and foreign exchange? Will tariff-affected inventory impact the P&L in late June and July? When will the pricing impact occur?
A: The inventory value impact is driven primarily by higher Average Unit Costs (AUCs) related to tariffs and foreign exchange. A detailed split wasn't provided, but their relative contributions are fairly similar. The tariff impact on the P&L will be more pronounced in Q2 (60 basis points). Full-year tariff headwind is 40 basis points, with mitigation measures coming in the second half. Pricing adjustments will begin rolling out in the latter part of this quarter (Q2) and into Q3.
Q: What drives the reduction in product cost, and will this be offset in the second half?
A: Product cost reductions are mainly driven by mix differences relative to expectations. The forecast for second-half mix is already reflected in the current guidance. Product cost isn't currently considered a driver of variance for the full year.
Q: Q2 Selling, General & Administrative (SG&A) expenses appear high. Does this reflect a change in view about growth investments, or is it related to the timing of planned investments in the second half?
A: Full-year guidance: Revenue remains at 11.3B - 11.5B, consistent with the previous view. Operating margin is improved by about 60 basis points versus the prior guidance, primarily driven by changes in tariffs and markdowns. The higher Q2 SG&A rate is due to two factors: 1) Year-over-year (YoY) pressure because Q2 last year saw operating margin expansion of 110 basis points, which represented over 50% of the full-year expansion. 2) Compared to the full year, the Q2 operating deleverage of 170-190 basis points is driven by an increased YoY SG&A rate. This increase is due to foundational investments (including depreciation), strategic investments, and the reinstatement of expenses discussed last quarter (like store labor). The full-year operating deleverage expectation is 50 basis points.
Q: What drove the significant YoY slowdown in China's comparable store sales growth? With easing base effects in China and other regions, will comparable store sales growth accelerate in upcoming quarters?
A: Both China's underlying trends and comparable store sales growth experienced a slowdown. Approximately 400 basis points were attributed to the timing of the Chinese Lunar New Year. Last year saw exceptional revenue growth partly driven by non-comparable new stores and some co-location strategies exceeding expectations (Q4 growth reached 39%). The company remains satisfied with China's trends, maintaining strong double-digit growth, and affirms its full-year expectation for China growth of 25%-30%.
Q: Is China still the global market with the highest full-price sales?
A: China remains the market with the lowest markdowns and highest proportion of full-price sales.
Q: With a $1.7 billion revenue target for International by year-end, does this make the company more vulnerable to China's macro environment? How is the growth slowing situation in the Rest of World (ROW) market?
A: From the company's perspective on international opportunities, nothing has changed. The quarter's performance and full-year guidance demonstrate that Mainland China, ROW, EMEA, and APAC are all performing strongly, maintaining double-digit growth momentum. The company is still in the early stages regarding market share and unaided brand awareness. New customer acquisition is healthy, and existing customers are repurchasing. Consumers are responding positively to newness and core lines. Last year saw extraordinary growth in some markets; compared to peers, the company gained share and remains confident in future growth opportunities. International represented 25% of business last year, with the potential to reach a 50-50 split in the future. Continued growth is anticipated.
Q: On a basis point basis, what is the impact of markdowns (promotional activity) included in the gross margin guidance?
A: For the full year, it's expected to be 10 to 20 basis points higher compared to last year.
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