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Agile Lululemon Navigates Building Industry Headwinds, VF Corp and The North Face, Not So

Thomas Paulson
Dec 9, 2022
Agile Lululemon Navigates Building Industry Headwinds, VF Corp and The North Face, Not So

  • Lululemon reported +26% growth in North America with YoY store traffic (+25%) and average unit retail (AUR) both increasing, but conversion rate coming in lower. E-commerce increased 34%, making Lululemon one of the rare large brands that continues to produce significant e-commerce growth. However, Lululemon is aggressively expanding in China, which may explain its anomaly (Mainland China was up +70% during the quarter despite 22 closed stores). Women’s continues to drive the business, up $220M YoY and relative to total company growth of $407M.
  • As a reminder, Lululemon's management intends to drive growth by new products, new categories, and international expansion. Expansion in its U.S. footprint is to be modest and at a single-digit level on top of its current 330 locations.
  • Trailing-twelve-month (TTM) sales per square foot increased $27 QoQ to reach $1,467 and it should increase to $1,630 by this time next year.
  • TTM EBITDA and free cash flow of $1.9B and $0.2M, respectively, should increase to over $2.3B and $1.1B by next year as inventory turns improve. Inventory turns deteriorated QoQ from 2.4X to 2.0X; in 2019, inventory turns were 3.4X. (In other words, Lululemon is 70% too high with respect to inventory).

  • VF Corporation's long-running CEO and Chairman Steve Rendle surprised the market this week with the announcement that he will leave the company, effective immediately. Benno Dorer, VF Corporation's Lead Independent Director, has been named Interim President and CEO, while board member Richard Carucci will serve as Interim Chairman.
  • In conjunction with the CEO transition announcement, the company also announced that its sales and earnings would be below prior expectations. This marks the fourth negative EPS guidance revision for VF since they issued their initial FY23 outlook in May. Earnings were initially intended to be around $3.40 for the year and are now seen in the $2.10 region, with the latest cut due to canceled wholesale orders by U.S. retailers. We suspect that most of the cancellations are focused on Vans, where there is more category momentum and brand heat with HEYDUDE, Converse, and Nike. Any note of support for The North Face was also absent from the press release as it also read "weaker than anticipated consumer demand across its categories".
  • REI traffic looks to be relatively even recently; however, as shown below there was the soft patch in the second half of October and early November that impacted most retailers. Should that trend also be emblematic of the outdoor retail sector in general, that could have led to an overall larger cancellation/pause in orders for The North Face.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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