Lululemon Athletica Q2 Review: China Growth Story A Testament To Success Of Its Business Model

Perhaps due to accelerated expansion, same-store sales for Lululemon's global business in the quarter did not meet expectations. Same-store sales were lower than expected, with a year-over-year increase of 11%, compared to analysts' expected 12.1%. Gross margin was 58.8%, slightly higher than analysts' expected 58.5%. North American business revenue increased by 11%, and international business increased by 52%.

In recent years, the company has adopted an aggressive growth strategy, aiming to achieve revenue of $12.5 billion by 2026, doubling its growth in 2021. The current annualized revenue is $8.84 billion. To achieve this goal, the company has been expanding its stores in recent years and hopes that its men's clothing and direct sales businesses can double their revenue. Men's clothing revenue increased by 15% this quarter. Lululemon has also opened 10 new stores, including one in Thailand. The company now has a total of 672 stores worldwide.Currently, Lululemon has a total of 107 stores in Mainland China, and most of the 35 new stores opened this fiscal year will also be located in China.

In addition to growth, the company is also addressing inventory issues left over from the post-pandemic period. The overall level of inventory has decreased, but it has increased this quarter. The financial report showed that the total inventory for this quarter was $1.7 billion, a 14% increase from the same period last year.

Regarding guidance, due to the impressive performance growth, the company has raised its full-year guidance. Lululemon has observed that Chinese consumers, especially affluent consumers, have maintained their enthusiasm for comfortable outdoor sportswear after the epidemic, which gives Lululemon confidence in maintaining sustained growth. But Lululemon's confidence in the Chinese consumer market has not been conveyed to its peers.The company now expects sales for the full year to be between $9.51 and $9.57 billion, higher than the previous range of $9.44 and $9.51 billion. Earnings have also been revised upwards, with expected earnings per share for the full year expected to be above $12, higher than the previous highest of $11.94. Due to overall pessimistic expectations for consumption recovery, several companies including Nike, Dick's Sporting Goods, and Foot Locker have taken a cautious stance on the second half of this year.

I believe that Lululemon's ability to continue to grow in the face of consumer headwinds reflects its strong brand advantage. For long-term investors, this is more important than numbers because the environment may be good or bad, and products may have different responses. However, the core competitiveness of the brand is more certain in the long term. Lululemon's strong recovery precisely illustrates that consumer habits after the epidemic are still difficult to summarize with a single keyword, although our preference for casual athletic wear has remained, not all companies in this category are growing.

Of course, we cannot ignore the company's short-term risks. The macroeconomic pressure is still the biggest challenge Lululemon faces in the short term, especially the recovery of US student loans, which will impact young people's consumption. In addition, the slowdown in the Chinese economy will also put pressure on the company's future performance.