Lululemon cut its guidance and posted its first revenue loss in more than two years on Thursday after a long-awaited product launch failed and growth slowed in the Americas.
The company now expects full-year net income to be between $10.38 billion and $10.48 billion, up from a previous range of between $10.7 billion and $10.8 billion. Lululemon expects earnings per share to range from $13.95 to $14.15, down from previous guidance of $14.27 to $14.47.
Here’s how the company fared in its fiscal second quarter compared to what Wall Street expected, based on a survey of analysts from LSEG, formerly Refinitiv:
- Earnings per share: $3.15 vs. $2.93 expected
- Annuity: $2.37 billion vs. $2.41 billion expected
Lululemon shares rose more than 2% in extended trading after an initial decline.
The company’s reported net income for the three months ended July 28 was $393 million, or $3.15 per share, compared with $342 million, or $2.68 per share, a year earlier.
Sales rose to $2.37 billion, up about 7% from $2.21 billion a year earlier. Beyond total sales, Lululemon also missed expectations for comparable sales, which rose 2%, well behind estimates of 5.9%, according to StreetAccount. Comparable sales in America were down 3%.
The trend does not look set to improve in the current quarter. Lululemon said it expects sales to rise 6% to 7%, worse than the 9.2% growth expected by analysts, according to LSEG.
However, Lululemon’s earnings guidance is roughly in line with what Wall Street expected. The company said it expects third-quarter earnings per share to range between $2.68 and $2.73, compared with estimates of $2.70, according to LSEG.
During the quarter, Lululemon pulled the Breezethrough leggings, released in early July, after receiving a wave of complaints about the product’s flattering fit.
On a call with analysts, CEO Calvin McDonald referred to the Breezethrough launch and said it was an opportunity for the company to “test and learn.” He added that Lululemon purchased a small amount of product for the launch.
“While guests were excited by the fabric, the design fell short of their expectations. Listening to our guests is central to who we are and how we grow our brand, and we made the right move to stop selling and look forward to we’re bringing fabric back into the future,” McDonald said. “This decision had a negligible impact on our performance this quarter.”
The botched launch came after the company faced other issues with its assortment, including a lack of colors and sizes desired by its core customers, which impacted sales in the U.S. During the quarter, sales grew only 1 %. in the Americas, the company’s largest region.
On the call with analysts, McDonald acknowledged that Lululemon’s women’s business has slowed in the US. He said the company has determined that the “most significant factor” affecting the segment is a lack of new styles, which has hurt pants sales and the company’s online business.
“The new thing is that we were performing well. We just didn’t have enough to inspire her to buy,” he said.
McDonald insisted the Lululemon brand “remains strong in the US market” and said its men’s business continues to grow.
“Visitors are looking for our product, coming to our stores and visiting our e-commerce sites,” McDonald said.
Lululemon’s product challenges follow the departure of longtime chief product officer Sun Choe, who stepped down in May to pursue another opportunity. At the time, the decision weighed on Lululemon’s stock amid concerns that Choe’s division would hurt the company’s ability to innovate and continue to win over customers with trendy new apps.
McDonald said Lululemon had a succession plan in place at the time of Choe’s departure and said the company’s global creative director, Jonathan Cheung, will report directly to McDonald and oversee product design and innovation.
The company also appointed Nikki Neuburger as its new head of brand and product activation, overseeing merchandise, footwear and product operations. On Thursday, McDonald said he and Neuberger are “pleased” with the new structure, which puts design and merchandising on “equal footing” and “restores the healthy balance that should exist in a product organization.”
“The teams are working well together and are already in action,” McDonald said.
Like other retailers seeing demand slow, Lululemon appears to be focusing on what is within its control: functions and efficiency. While the sales picture during the quarter was rougher than expected, Lululemon’s earnings were higher than expected.
Gross profit rose 9% to $1.4 billion, while gross margin rose 0.8 percentage points to 59.6% — better than the 57.7% analysts expected, according to StreetAccount. Operating margin and operating income also increased.
Sales rose 29% in Lululemon’s international markets as the company looks to China for growth.
