Dive Brief:
- Lululemon’s slower growth in the U.S. continued in the first quarter, as CEO Calvin McDonald told analysts the retailer missed opportunities in its women’s business. McDonald blamed the miss mostly on a color palette in its core leggings category that was too narrow, as well as out-of-stocks in smaller sizes.
- Even with the disappointment, comps in the Americas region were flat in Q1, while net revenue increased 3%, per a company press release. International revenue, on the other hand, was up 35% thanks to a sharp 45% increase in China.
- Despite the slowdown in its largest region, Lululemon still posted revenue growth of 10.4% for the quarter (for a total of $2.2 billion) and comparable sales up 6%, on top of strong growth last year. Net income in the quarter also grew, increasing 10.7% to reach $321 million.
Dive Insight:
McDonald sought to quell concerns about a slowdown in Lululemon’s more mature Americas business on Wednesday, saying a lot of the company’s innovation and newness is planned for the back half of this year.
The executive also stressed that its growth opportunities in the U.S. are unchanged, including low brand awareness, the ability to expand categories like performance, lounge and social, and a store fleet that is still growing and can be further optimized. The company’s membership program is a potential growth vehicle as well, and now has 20 million members in North America, McDonald noted.
Analysts acknowledged that the slowdown in the U.S. was not as concerning as some feared, but it still represents a challenge for the athleisure brand, which is used to posting consistently strong growth. BMO Capital Markets noted that Lululemon is now posting “among the worst gross margin results of the group” and GlobalData Managing Director Neil Saunders called the Americas revenue growth “the most disappointing and worrying aspect of Lululemon’s performance as it suggests that the company is reaching maturity in its core market.”
Brands like Vuori and Free People Movement are also increasingly encroaching on Lululemon’s turf, according to Saunders, threatening its share of wallet.
“This gives consumers more choice and allows them to add variety to their closets – which many seem keen to take advantage of,” Saunders said. “The good news for Lululemon is that, from our data, very few American shoppers are abandoning it completely in favor of other brands. They are simply sharing their spend on athleisure more widely.”
The recent departure of former Chief Product Officer Sun Choe, who is now leading Vans, also creates potential problems for Lululemon going forward. However, McDonald stressed that the new product and marketing structure it rolled out in her absence is aimed at increasing the speed of innovation and driving more creativity.
“While there are [undoubtedly] some challenges domestically (including competition from brands like Alo and Vouri and the departure of former Chief Product Officer Sun Choe), we believe there remains a long runway internationally and on the men's side,” Wedbush analysts led by Tom Nikic said in emailed comments. “Plus, they can potentially reinvigorate the core U.S. women's business via product innovation and better sizing/color availability.”
International is also a continued growth opportunity, though McDonald said the company is already “in the bulk of the right markets” to drive growth overseas. The company entered into an agreement to buy one of its franchise partners’ Lululemon Mexico operations in the quarter, allowing it to acquire 15 stores in the country for $160 million.
