Lululemon Athletica delivered a stellar Q3 performance, beating both EPS and revenue expectations, and raising its FY24 guidance, which sent the stock surging 9%. EPS came in at $2.87, surpassing the $2.75 consensus estimate, while revenue rose 9% year-over-year to $2.40 billion, exceeding expectations of $2.36 billion. The company's gross margin expanded 40 basis points (bps) to 58.5%, above estimates of 57.5%, driven by lower inventory provisions, improved product margins, and favorable FX. Operating margin also impressed, rising to 20.5%, ahead of the 19.7% estimate.
Comparable sales increased 4% (3% on a constant currency basis), with robust international performance offsetting muted growth in the Americas. International sales grew 33% year-over-year, with China leading the way, up 39%. In the Americas, sales improved sequentially to 2.2% growth, compared to 1.3% in Q2, as customers responded to new seasonal colors and prints, signaling progress in addressing inventory and assortment challenges.
Key drivers of the strong results included a renewed focus on product "newness," as management successfully integrated its merchandising and brand teams to enhance assortments. Seasonal items like colors, patterns, and prints resonated well with consumers, with a return to historical levels of "newness" expected by Q1 FY25. Inventory management also showed improvement, with inventory levels decreasing to $1.80 billion, below the $1.87 billion estimate, showcasing effective controls in a challenging retail environment.
Geographically, international markets were a standout, continuing their momentum as Lululemon expands its global footprint. The company’s acquisition of its Mexico franchise during Q3 bolstered growth in the region. Meanwhile, management highlighted low unaided brand awareness in the U.S. (36%) as an area of opportunity, reaffirming confidence in domestic growth potential despite modest Q3 results. The men’s category and international expansion remain key long-term growth drivers.
Lululemon raised its FY24 guidance to reflect its strong performance, now expecting revenue of $10.45-$10.49 billion (up from $10.38-$10.48 billion) and EPS of $14.15, slightly higher than its prior range of $14.05. The company also authorized a $1 billion increase in its share buyback program, underscoring confidence in its financial strength and commitment to shareholder returns. However, management maintained a conservative outlook for Q4, citing macroeconomic uncertainties and a condensed holiday shopping period.
Analysts responded positively to the results, raising price targets across the board. Guggenheim increased its target to $415 from $350, while Telsey Advisory Group lifted its target to $430 from $360, citing Lululemon’s strong execution, improved U.S. trends, and sustained international momentum. Despite the stock's rally, analysts noted it remains attractively valued, down 27% year-to-date compared to the S&P 500’s 27% gain, providing a potential entry point for investors.
Lululemon’s non-promotional strategy and premium positioning continue to differentiate it in a competitive retail landscape. The company's ability to execute on gross margin improvements while navigating challenges in the Americas and leveraging international growth underscores its operational excellence. Early holiday sales trends have been encouraging, with strong full-price selling suggesting potential upside in Q4.
In summary, Lululemon’s Q3 results highlight its resilience and ability to adapt to market dynamics. The company’s focus on product innovation, disciplined inventory management, and global expansion positions it well for sustained growth. While challenges remain in the U.S., progress in "newness" and stabilization in key categories signal a promising outlook for FY25 and beyond. Investors rewarded the strong performance, with shares rallying on the back of multiple price target upgrades.