Net revenue grew to $902.9m from $883.4m a year earlier, above company expectations of high single-digits decline

Net revenue grew to $902.9m from $883.4m a year earlier, above company expectations of high single-digits decline

Canadian activewear brand Lululemon Athletica has reported a 30% drop in second-quarter profit but CEO Calvin McDonald remains cautiously optimistic for the second half of the year as sales in the quarter edged up by 2%. 

For the three months ended 2 August, net income tumbled to $86.8m from $125m a year earlier. Gross margin was 54.2%, a decline of 80 basis points compared to the second quarter of fiscal 2019.

Net revenue grew to $902.9m from $883.4m a year earlier, above company expectations of high single-digits decline. On a constant dollar basis, net revenue increased 3%.

As a result of the Covid-19 pandemic, all of the company's stores in North America, Europe, and certain countries in Asia Pacific were temporarily closed during the first quarter of fiscal 2020. Lululemon began reopening its retail locations in these markets during the second quarter of fiscal 2020. As of 2 August, 492 of its 506 company-operated stores were open.

Company-operated stores net revenue was $287.2m in the second quarter, a decrease of 51% compared to last year.

Direct to consumer net revenue, meanwhile, surged 155% to $554.3m, or 157% on a constant dollar basis, and represented 61.4% of total net revenue compared to 24.6% last year.

Lululemon ended the second quarter with $523m in cash and cash equivalents and the capacity under its committed revolving credit facilities was $697.7m. Inventories were up 36% to $672.8m from $494.3m a year ago.

"We're pleased with our overall business results for the second quarter, as Lululemon increasingly lives into its omni potential. As trends around the world are shifting to working and sweating from home with an increased focus on health and wellness, we believe 2020 is likely an inflection point for retail and for Lululemon," McDonald said.

"We are cautiously optimistic with regard to the second half of the year as we continue to navigate the uncertain environment."

The results come two months after Lululemon closed a deal to acquire in-home fitness company Mirror for $500m amid a rise in home workouts sparked by lockdowns following the Covid-19 pandemic.

Launched in 2018, Mirror has developed an interactive workout platform that offers live and on-demand fitness classes and personal training in a variety of workout genres via its mirror device.

The acquisition builds upon Lululemon's Power of Three five-year plan, which was announced last year and aims to drive product innovation, create integrated omni-guest experiences, and expand deeper in key markets around the world, ultimately boosting revenue and earnings growth.

Speaking to analysts on the firm's second-quarter earnings call today (9 September), McDonald said Lululemon is on track to begin offering the Mirror in between ten and 15 US stores at the begining of the fourth quarter.

"From a financial standpoint, we continue to believe that Mirror will be modestly dilutive to earnings this year. We plan to ramp up marketing and advertising spend in the second half of the year to fuel Mirror's momentum during the holiday season and into 2021. The initial work we are doing with Mirror during the upcoming fall season will set the stage for next year when we expect to be more aggressively leveraging the power of the Lululemon ecosystem to grow the Mirror business," he said.

Meghan Frank, senior vice president, financial planning and analysis, added the firm now expects Mirror to generate in excess of $150m in revenue for the full year 2020, up from initial expectations of revenue in excess of $100m.

B.Riley analyst Susan Anderson notes: "Lululemon's strong quarter despite store closures and lower store revenues indicates a strong consumer preference for technical and premium workout apparel. We also believe management has prepared the company well to handle the significant increase in e-comm spending and believe they are taking proper steps to help capture sales during the holiday season. Although the Mirror transaction will be dilutive to EPS in the short-term due to management increasing marketing spend, we continue to believe Lululemon will outperform peers longer term."