Back in September we raised the possibility of a worst-case, Under Armour-style scenario for the yoga-wear specialist. The group is indeed changing status, as years of double-digit growth now seem to be a thing of the past. International expansion, notably in China, is not working as planned, even though it remains the growth engine. In the US (62% of revenue), the picture is hardly any better. American consumers are limiting spending to essentials and are being held back by the removal of the tax exemption on small parcels.
That said, in Q3 (results presented yesterday), revenue rose 7% to $2.6bn, almost exclusively driven by international. Margins fell due to the factors mentioned above and an excessive use of promotions. The US.market remains in decline (-5% on a comparable basis). Adding to this challenging backdrop is the departure of CEO Calvin McDonald, slated for early next year after seven years at the helm. Let's not forget that under his leadership, the group tripled its revenue since 2018, expanded internationally, and strengthened its brand position, while maintaining a solid financial structure with $1bn in cash and no debt.
However, Lululemon needs renewal and to enter a new cycle. That likely means a change in top management. Competition is fierce and, without a bold action plan, things will not improve. Styles will now be refreshed more frequently. The company is working on better presentation of its collections, in stores and online, with assortments more closely tailored to local specifics and a deliberately reduced number of references, to better showcase new products and get them to market faster by shortening development lead times.
That explains the stock's strong positive reaction. Things are not drastically better (we're still far from it; visibility is low), but Lululemon is playing fresh cards. Even so, Q4 looks tougher as demand has softened despite a good start to the holiday season.
