Lululemon produced another set of strong financial results for Q2 2023, with sales up +20% and strong profits. While U.S. sales growth of +11% was only half of last quarter’s growth, that slower growth was really due to tougher comparisons and the U.S. business will be over 2x its size compared to 2019. During that period, the U.S. store footprint expanded from 300 locations to 360. While +11% is certainly a lower rate than +20%, we would remind readers that the athletic footwear and apparel category in the U.S. is in quite a depression at the moment as it works off the excesses of 2020 and 2021.
CEO Calvin McDonald said of its women’s business, “Guests are responding very well to our core franchises as well as our newer play activities. We continue to see strength in our key franchises, including scuba, define, and our dance studio jogger. In addition, Softstreme (its lounge offering) has emerged as another meaningful franchise for us...Turning to play, our tennis and golf collections remain strong performers for us. As we've shared before, our strategy with plays to solve for our guests' unmet needs across their secondary sweat activities...Our business driven by new guests coming in as well as our team's ability to retain existing guests and increase share of wallet and spend with them. Nothing that would signal they're behaving differently in very healthy and contributing factor to the overall business, both with new existing very low retained, very high guest loyalty, longevity and engagement in the brand and responding to the newness and the innovation continues to sort of be that guest formula. ”
In terms of footprint expansion, CFO Meghan Frank shared that they are looking at high-single-digit expansion in the U.S., which is a shift of focus to our ears. Previously, we wrote that management’s lead market for expansion was China. However, for the quarter, China, which is only 13% of revenue, grew by only +10%. Over the past year, they added only 10 stores in China (+11%) compared to 20 in the U.S., in what is a far more developed market (the U.S. represents 60% of revenue). Over the past three months, the business press and politicians have been bounteous that China’s economy and consumer were sluggish, if not in real trouble. Last year, one of our major themes was that global brands would shift their focus from chasing the Chinese consumer to chasing the U.S. consumer. Lululemon is one of those brands and that is a continued favorable development for U.S. retail commercial real estate.
For the year, Lululemon stores in the U.S. will average $10M in revenue, or $18M if digital-originated sales are included. For the year, the brand will increase its U.S. revenue by +$500M; for perspective, Nike will increase its U.S. revenue in apparel by +$300M (on a retail-equivalent basis). On a near apples-to-apples comparison, Lululemon will grow its business by 67% more.
Looking at just one market--Beverly Hills--Nike’s store at the Grove does huge volume, roughly 6x that of Lululemon’s Grove location. However, Lululemon has a lot of locations (30) in the Los Angeles Designated Market Area (DMA), thus spreading its business around. By contrast, Nike has only 17 locations in the DMA. Two of these are community stores, five are Nike Well Collective locations, six are factory stores, and four are larger locations like the Grove. If one excludes the factory stores, it may be the case that Lululemon is larger than Nike with respect to full-price sales in the DMA, especially when digital-originated sales are included,
While a brand like Alo Yoga may produce more visits than the neighboring Lululemon (as shown in the images below), Lululemon is pulling far more demand out of the market. We would expect Los Angeles to make up a low- to mid-teens portion of Lulu’s U.S. business, or over $800M. Wow! That is nearly the total domestic box office of Barbenheimer ($900M). Unlike a box office splash, Lululemon’s Los Angeles phenomenon and success can repeat year after year, if they keep coming out with highly desired product (which they have a proven knack for). For Alo, spreading around (i.e., more locations) would seem to be a priority for what is a very influential (influencer-based) market.
