Lululemon’s Digital Business Remains a Bright Spot While Revenues Fall

William Arsn

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Lululemon Athletica has taken a hit from the coronavirus — but executives say it’s only temporary. 

“Certain things won’t change because of COVID-19 and certain things will,” Calvin McDonald, Lululemon’s chief executive officer, said on Thursday evening’s conference call with analysts. “Among the things that won’t change, that’s living an active lifestyle… And the things that will change also play into our strengths. And that’s comfort, working from home and the shift towards digital and e-commerce.” 

Even so, the athletic apparel and accessories retailer posted quarterly results that fell short on both the top and bottom lines after the majority of its stores were forced to close during the period. 

Revenues for the three-month period ending May 3 were $652 million, down from $782 million the same time last year, while profits were just $28.6 million, compared with $96.6 million a year earlier. 

Shares of Lululemon, which closed down 4.7 percent Thursday to $308.12 a share, continued to fall by more than 7 percent during after-hours trading as a result. But McDonald said he was proud of how his team navigated the pandemic. 

“We are learning more every day about our guests, how they enjoy interacting with us online and what makes them comfortable as stores reopen,” McDonald said in his prepared remarks. “Our strong digital business demonstrates the strength of our guest connection and the long-term opportunity to create further omni experiences going forward.”

In fact, e-commerce comps surged during the quarter, up 70 percent compared with the same time last year — up 125 percent in April alone. 

“There’s no doubt that our online business will be a new normal coming out of the pandemic that will be higher than before,” McDonald said on the call. He added that there will likely be more omnichannel guests, or guests who use of combination of in-store and online shopping methods — and who tends to spend more money. 

Still, digital increases weren’t enough to offset the losses caused by store closures. Inventory increased 41 percent during the quarter to $625 million, compared with $443 million the same time last year. 

Like most retailers, Lululemon was forced to close all stores in North America and Europe in March to help curb the spread of the coronavirus. In late May, the company began a phased reopening plan. As of Wednesday, 295 stores out of the company’s 489 had reopened. The company said it expects to reopen the rest of its fleet by the end of June, but will evaluate opening each store market by market.  

Meanwhile, all store events and classes remain on pause for the foreseeable future. When stores do reopen, Lululemon’s updated cleaning and sanitation practices will include face masks for employees, cashless payments, BOPIS options at select locations and limits on how many people are allowed in a store at once. 

In the meantime, analysts remain pleased with Lululemon’s progress. Even amid the current global health pandemic and quarantine orders, the retailer’s stock is up 80 percent year-over-year. It is also one of the few retailers to be trading above pre-COVID-19 levels. 

“We maintain our view that Lulu is poised for [long-term] tailwinds on the other side of COVID-19, given its sweet spot of innovation, loyalty and casual/athletic focused assortments,” Kate Fitzsimons, equity analyst at RBC Capital Markets, wrote in a note. 

Activewear was a bright spot during the quarter, not just at Lululemon, but throughout the retail industry as consumers around the world were ordered to shelter in place. On the call McDonald pointed out a recent NPD Group note that said Lululemon gained market share in the athletic apparel category in North America during the quarter. 

Some of the most popular categories included training, yoga and the women’s bottom business. 

“The desire to wear technical apparel that provides comfort is here to stay,” Sun Choe, chief product officer at Lululemon, said on the call. 

The company is not providing forward-looking guidance, but McDonald did say that traffic at most of its stores in China — which were forced to close earlier than the rest of the world because of the outbreak — have returned to pre-COVID-19 levels. He added that the company ended the quarter with $1.2 billion in total liquidity while continuing to make rent payments during the quarter and pay employees even with stores closed. 

“We have much to celebrate, including seeing store-only customers beginning to transact with us online,” McDonald said. “Most of what we experienced in Q1 was some short-term operational challenges. But the demand for our product will continue. And those short-term operational challenges will go away.”

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