Lululemon Says It Is Fixing Bloated Inventories Without Sacrificing Profit
Lululemon just beat expectations for the fourth quarter, despite recent inventory surges that prompted markdowns.
The Vancouver, British Columbia-based brand reported a fourth quarter revenue increase of 30% to $2.8 billion. Adjusted diluted earnings per share were $4.40 compared to $3.37 in the Q4 of 2021. These results came ahead of the company’s previously outlined targets that reflected weak predictions for the holiday season and a hit to profit due to increased markdowns.
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After utilizing some markdowns to clear through excess inventory, full-price selling activity normalized through January and into Q1. Inventories, a key focus point for analysts this quarter, were up 50% to $1.4 billion at the end of 2022 and markdowns were essentially flat from Q4 of 2019. Season-less core product made up almost half of this inventory. Lululemon expects inventory growth to continue to moderate throughout 2023 as it maintains a full-price selling model, with inventories in Q1 expected to be up between 30% and 35%.
“We do not drive our top line growth through discounts or promotions, and we have no intentions to do so,” Lululemon CEO Calvin McDonald said in a call with analysts. “We run a full-price business with markdowns strategically used to clear seasonal and other select product, and this will remain our approach in the future.”
The inventory progress prompted a positive response from some analysts, who expect the progress to continue in Q1.
“Investors seemed worried elevated inventory levels and Lululemon’s recent gross margin misses were signs the company’s growth rate was poised to decelerate,” wrote UBS analyst Jay Sole in a Tuesday note to investors. “The key learning for us from Lululemon’s Q4 2022 report is those worries appear overdone.”
Sole last week cited UBS data that showed that Lululemon’s online and in-store inventory was “starting to get under control.” At the same time, he noted that the company’s typical pattern is to have inventory drop between Q3 and Q4, which could also have helped alleviate higher-than-usual inventories. Wedbush analyst Tom Nikic also noted last week that Lululemon’s discounts, specifically via its “Made Too Much” section on its website, have recently moderated as well.
“With inventories and gross margin moving in the right direction, we believe the biggest overhang to the stock has been alleviated,” Wedbush noted on Wednesday.
Morgan Stanley analysts led by Alex Straton also took a bullish view on the stock, given the upbeat outlooks in inventory, gross margin and full-year 2023.
“Importantly, Lululemon proved it could reduce inventory levels without significant markdown pressure,” Straton wrote to investors.
Throughout the most recent quarter, retail companies have reported sluggish sales and earnings misses as they manage through inflation, foreign exchange headwinds and consumer caution. Genesco, which owns Journeys, Johnston & Murphy and Schuh, this quarter adopted a cautious outlook for fiscal year 2024 after reporting weak results for the holiday season. Nordstrom Inc. was impacted by steeper markdowns and macro-economic headwinds and reported fourth quarter declines on the both the top and bottom lines earlier this month.
Lululemon’s Q4 results made it “one of the big retail winners across 2022,” according to a note from GlobalData managing director Neil Saunders.
“Despite a long period of stellar growth, Lululemon’s outlook remains solid,” Saunders said.
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