TLDR;
This video discusses Lululemon's Q2 earnings, the market's negative reaction to the earnings call, and the investor's perspective on the stock. Despite beating EPS estimates, concerns arise from slowing revenue growth, declining comparable sales in the Americas, and reduced operating margins due to tariffs. Management acknowledges issues with product life cycles and competition, planning to introduce more new styles. The investor is holding onto their shares, citing confidence in the management team and their capital allocation strategy, but anticipates a slow recovery.
- Q2 earnings beat EPS estimates but missed on revenue.
- Americas revenue declined, while international revenue, particularly in China, grew.
- Management acknowledges product issues and plans to increase new styles.
- Tariffs significantly impact gross margins.
- Investor is holding shares due to confidence in management but expects a slow turnaround.
Introduction [0:00]
The video introduces a discussion about Lululemon's stock, focusing on their Q2 earnings and the market's reaction, which led to a 20% stock decrease. The speaker, an investor in Lululemon, shares his perspective on the earnings and his plans for his shares. He notes that while the earnings themselves weren't terrible (they beat on EPS), the earnings call was concerning. However, he also found management's honesty about the company's current state refreshing. The speaker got into Lululemon initially because of its strong balance sheet, tremendous growth, high return on invested capital, unique business model with both e-commerce and brick-and-mortar stores, and industry-leading operating margins.
Q2 Revenue & Earnings [2:15]
Lululemon's Q2 total revenue increased by about 7% (6% on a constant dollar basis), reaching $2.5 billion, but missed the top-line estimates. Global comparable sales increased by 1%, but Americas revenue decreased, which is a major concern. International revenue is growing, with China mainland net revenue increasing by 25% (24% on a constant dollar basis). By the end of the year, international revenue will account for about 30% of total revenue, while North America accounts for 70%. The company opened five new stores in the Americas, five in China mainland, and four in the rest of the world. The total company-operated stores at the end of Q2 is 784, compared to 721 the previous year, representing almost 10% growth. Gross profit was $1.5 billion, with a gross margin of 58.5%, down from 59.5% the previous year, a 110 basis point decrease. This decrease is attributed to tariffs and higher markdowns to clear inventory. The company anticipates a 260 basis point hit on gross margin for 2025, with a more immediate impact of 400 basis points expected for Q3. SG&A expenses increased to $950 million, about 1% higher than the previous year, representing 37% of revenue versus 36.8%. Operating income was $523 million, with operating margins at 20.7% compared to 22.8% the previous year. Net income was $370 million, or $3.01 per diluted share, compared to $3.15 from the prior year, beating analyst estimates of around $2.80.
Share Buybacks [6:17]
In Q2, Lululemon repurchased 1.1 million shares for approximately $278 million, averaging $247 per share, representing roughly 1% of their total shares. The company still has around $1 billion remaining in its share buyback program. The management has been strategic and effective in allocating capital, particularly with share buybacks when the stock price has fallen. The investor hopes the company continues buying back shares aggressively if the stock falls below $220, given their high cash flow.
Cash [7:33]
Lululemon has $1.2 billion in cash at the end of the quarter. The company's market cap has fallen below $20 billion, and they still have about $1 billion in their share buyback program. Inventories increased by 21% to around $1.7 billion, which is in line with expectations.
Management Mishaps [8:14]
The earnings call revealed management's direct and honest assessment of the business. CEO Calvin McDonald stated that Lululemon allowed product life cycles to run too long, particularly in lounge and social categories, becoming too predictable and missing opportunities to create new trends. The market for premium athletic wear in the US remains challenging, with declines continuing in Q2. The competitive landscape has changed, with many players impacting the market. The primary cause of product challenges in the US is over-reliance on core franchises in lounge and social wear, lacking a balance between existing and new styles. A secondary cause is the lack of agility in the go-to-market process to test new styles and react to guest demand. The company is focusing on maintaining momentum in performance activities, designing new products across lounge and social categories, and giving a fresh perspective to iconic items. They intend to increase new styles from 23% to approximately 35% next spring.
Difficult to Invest in Apparel Companies [11:54]
Apparel industry is difficult because changes happen rapidly, and being reactive can allow competitors to enter the market easily. The speaker usually avoids investing in apparel companies for this reason. A small event, like American Eagle's marketing campaign with Sydney Sweeney, can significantly impact a company's stock.
P/E Valuation is Attractive vs Peers [13:20]
Lululemon's P/E ratio is around 12 or 13, while American Eagle's is over 30 and Nike's is over 40. Lululemon has stronger brand awareness and a customer base of over 30 million members, compared to Gap, which trades at a similar P/E ratio.
2025 Revenue Guidance [14:32]
Lululemon's revenue forecast for 2025 has dropped to between $10.8 billion and $11 billion, representing only 2% to 4% growth from the previous year. This is a significant decrease from the 15% to 20% growth the company has experienced over the last several years.
Has the Story Changed with LULU? [15:03]
The story around Lululemon may have changed, with concerns about product quality and increased competition in North America. However, the company has a great management team, and new products and advertising could change the situation quickly.
This is Going to Take Awhile to Recover [15:48]
The investor believes it will take a while for Lululemon to recover, with management focused on spring 2026 for new product releases. The best-case scenario for the company is 8% to 9% revenue growth next year. A couple of years ago, Lululemon aimed for $12.5 billion in revenue by 2026 and over 30% international revenue. International growth is expected to help the bottom line due to lower costs and no tariffs. The investor is not buying or selling shares, holding onto them due to confidence in the management team and their plans to address the company's issues. The investor anticipates a slow turnaround and doesn't expect to see any significant catalysts until next summer.