Lululemon Seems To Be Insulated From Recession With Its Premium Yoga Wear

On Tuesday, shares of Lululemon Athletica Inc LULU rose about 11% upon quarterly results that topped Wall Street expectations. The retailer of high-end yoga gear had quite a holiday-quarter that topped estimates on fiscal 2023 revenue and full-year profit. Unlike cautious Nike Inc NKE, Lululemon also issued upbeat guidance for the new fiscal year.

Fourth Quarter Figures

For the three-month period that ended on January 29th, revenue rose from last year’s $2.13 billion to $2.77 billion with net income falling from $434.5 billion, or $3.36 per share earned during last year’s comparable quarter to $119.8 million, or 94 cents per share. Putting aside impairment and other charges related to the acquisition of Mirror and other items, adjusted per share earnings amounted to $4.40. Total comparable or same-store sales that account stores that have been continuously open for at least 12 months rose 27%.          

Outlook

Lululemon expects fiscal 2023 revenue in the range between $9.3 billion and $9.41 billion, exceeding $9.14 billion that Wall Street expected, according to Refinitiv, with full-year profit expected in the range between $11.50 and $11.72 per share, also topping Refinitiv estimate of $11.26 per share.

Inventory Struggles

In December, Lululemon said inventories at the end of its third quarter were up 85% YoY to $1.7 billion while on Tuesday, it stated that as of the end of 2022, inventories were up 50% to $1.4 billion. As a comparison, during its latest reported quarter, Nike reported its inventories were up 16% compared to last year’s comparable quarter. Consequently, Lululemon’s gross margins fell 300 basis points to 55.1% while adjusted gross margin slid 70 basis points to 57.4% so both brands harmed their margins with efforts to get rid of excess inventory. 

Notably, Lululemon made progress liquidating excess inventory, but Morningstar analyst David Swartz told Yahoo Finance that it does look like Lululemon had to resort to more discounting to normal to get the reported sales figures, yet the Vancouver-based athletic apparel retailer does not like to talk much about discounting. 

What Does Lululemon Have That Nike Doesn’t?

Although both apparel companies do a great job at standing out from the crowd, Lululemon's attention is solely on the premium and higher end of the apparel market. In a way, Lululemon can be considered as a pioneer of the "athleisure" movement which allowed it to gather a customer base that even Nike failed to address fully. As people sought out more comfortable quality attire during the pandemic-induced lockdowns, Lululemon gained a significant advantage in terms of premium customers who are both willing and able to pay up for their athleisure wear merchandise and this is a great strength of Lululemon in the face of recession fears.  

The Lawsuit Saga

At the end of January, Nike revealed it is suing Lululemon for patent infringement related to at least four of its sneakers, stating it has suffered economic harm and irreparable injury as a result. This latest lawsuit is only a new chapter in a contentious legal history between the two companies as the Oregon-based Nike previously sued Lululemon for patent infringement over its at-home Mirror fitness device. In both cases, Lululemon finds these claims unjustified.

Takeaway

Lululemon’s results suggest that wealthier shoppers are still purchasing yoga wear, despite inflation rising prices for essential goods. Through Tuesday’s close, Lululemon’s market value reached $40.87 billion. Although this is still not a dominant brand in the industry like Nike, Lululemon’s is not going anywhere as the Vancouver-based athletic apparel retailer believes it is one of the few companies with a long pathway for growth ahead. It seems that premium yoga wear does a great job at insulating against a recession, but Lululemon still needs to prove its brand's durability over a long period of time. 

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.