Wall Street can be hard to please. Investors pushed lululemon athletics‘s (NASDAQ: LULU) lower stock as a result of the chain’s third quarter tax report, even though sales and profits are each exceeded expectations. Investors have looked beyond that success to focus on a few warning signs for the near future that imply a tough time for the athletics giant’s business.
CEO Calvin McDonald and his team described these issues in a conference call with analysts. Executives have pointed out that they are likely temporary and that lululemon’s long-term outlook is brighter than ever.
Let’s look at some highlights.
Winning in a competitive market
“In the third quarter of the year, our [market] Equity performance continued with our largest quarterly market share gain in recent history. We increased our retail market share in the US adult sportswear market by 1.4 percentage points from last year. “- McDonald
As COVID-19 has put pressure on parts of the apparel industry as more people work from home, the leisure sports segment is booming. Lululemon is also gaining a larger share of this expanding pie, with sales up 18% after adjusting for exchange rate changes.
This increase was supported by improved traffic to its physical stores and increased e-commerce volumes. Lululemon’s stores rebounded to 82% of last year’s sales level, while executives braced for a 75% weaker result. The retailer has made notable gains in new demographics, such as men’s wear, and in categories outside of its traditional strength in women’s socks. “These results show that our brand is getting stronger and stronger,” said McDonald.
Things will get worse before they get better
“As we see a resurgence of COVID-19 in several markets, we experienced a higher number of government-imposed capacity restrictions in November and December compared to the third quarter. – CFO Meghan Frank
Pandemic epidemics have once again erupted in key markets in Europe and North America, and the resulting retail restrictions have led management to forecast slower growth during the holidays. In fact, stores are only expected to operate at about 70% of last year’s volume in the fourth quarter, they warned – up from 82% in the last quarter – as governments seek to curb crowds.
Expanding digital business will partially offset this crisis, but lululemon will still feel a pinch from having to limit in-store traffic during a time when its stores are typically packed with holiday shoppers.
Plan for a slowdown
“In our store channel, we will leverage our seasonal stores, virtual waitlist, mobile point-of-sale and appointment shopping to alleviate capacity constraints and continue to protect the security of our store teams. And in e-commerce, our investments are paying off as our sites have demonstrated their ability to do more than handle the anticipated peak in volume. “–McDonald
Executives have advanced some of their planned e-commerce spending in 2021 to ensure a smooth shopping experience this year despite additional pressures on the digital distribution network. Lululemon also does its best to minimize the loss of in-store traffic by using features like online check-in and shopping by appointment.
These measures should give the retailer a good chance of maintaining its positive market share momentum in the fourth quarter. And another period of strong growth for the industry could push sales above management’s expectations, just as they did in the last quarter. But the outlook for lululemon still calls for a decline in growth trends in the coming weeks as pressures from COVID-19 return. Investors should lower their short-term expectations accordingly.
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