Will Inventory Troubles Trip Up Lululemon in Q4?

Lululemon Athletica (NASDAQ: LULU) found a way to shock Wall Street again by posting much faster sales growth than investors expected in Q2. That success lifted other key metrics, including cash flow and profitability, toward highs that might have seemed impossible as recently as 2019.

In a conference call with investors, CEO Calvin McDonald and his team hinted at a major upgrade to their five-year growth vision on the way in just a few quarters. And in the meantime, executives are targeting an epic 2021 fiscal year, including a big finish in the holiday period.

Let’s look at a few highlights from that earnings-call presentation.

Image source: Getty Images.

Zooming out

The headline growth number had most investors feeling flush, with sales jumping 61%, compared to expectations of around 50% gains. Yet the bigger picture is even brighter.

Lululemon’s growth on a two-year basis, which smooths out the disruption from earlier phases of the pandemic, accelerated from the prior quarter and from 2019. Executives pointed out that the chain is expanding at a 28% compound annual growth rate today, compared to 19% in the years leading up to the pandemic.

They said the success was broad-based, coming from both online and in-store traffic and running across its selling geographies. The core women’s apparel sold well, but so did menswear.

Product innovation ran through all of those wins, though, and that strength is a key reason why the company believes it can keep winning share in its established athleisure niches and in new ones like bras. “We know that bras is a wonderful category to drive loyalty with our guests,” McDonald said.

It’s a better experience

Lululemon’s digital sales grew 4% this quarter, representing an impressive boost, compared to last year’s 157% spike. The increase looks even better when you consider that the chain held a warehouse promotion sale last year that didn’t repeat in 2021.

The two-year annual growth rate for e-commerce is 66% today, blowing past management’s hopes for 55% gains. Popular merchandise is key to that win, but so is Lululemon’s improved shopping experience. The company added more payment methods, revamped product pages, and shaved seconds off the checkout process. All these factors “combined to elevate [shoppers] online guest experience,” executive Celeste Burgoyne explained.

Watch inventory pressures

Lululemon’s bullish outlook for the rest of the year comes with an asterisk tied to a fragile inventory situation. New supply-chain disruptions hit some major suppliers in Vietnam this quarter, on top of an already stressed inventory situation.

The retailer is speeding up its ordering for fall and Christmas seasonal items and paying up for air freight over ocean freight in many cases. Yet it still expects to enter Q4 with less inventory on hand than executives would like.

Looking further out, McDonald said the latest results appear to be boosting the sales level that Lululemon can reasonably target over the next five years. The growth company is already hitting a few of its original 2023 goals, after all, including annual revenue.

Management suggested that a big revision to the five-year growth outlook will be coming in early 2022 that incorporates its positive momentum in international markets, online, and in new demographics and apparel categories. But first, Lululemon will have to navigate through a tight and likely expensive supply-chain market as it works to keep inventory flowing through its system this holiday season.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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