Guys, we’ve talked about this.
After missing analysts’ earnings estimates by one penny, Lululemon CEO Laurent Potdevin extolled the virtues of his company’s new loose tops for layering and its menswear strategy. He sounded excited about opening 18% more square footage of stores over the quarter, and he praised his company for being “channel agnostic.”
It was a lovefest, and the only people more excited on the call than the CEO were the analysts. At least twice during the call, Potdevin’s optimistic rundown of the company was met with an even more enthusiastic “great quarter … really challenging environment … really challenging … great quarter” from Wall Street analysts.
Once upon a time, Business Insider’s Myles Udland highlighted a quote from SunTrust Robinson Humphrey Analyst Eric Selle, who told Bloomberg that telling management they had a great quarter is “like everyone getting a medal in soccer … It’s the most embarrassing thing to say as an analyst.”
It’s even more embarrassing because the biggest problem with Lululemon – high inventory levels cutting into gross margins – is still very much out there.
A story about tops
While topline sales growth grew, thanks in part to the fact that Lululemon opened more stores, inventory levels also rose 21%, to $286.2 million from $236.5 million at this same time last year.
That means more clothes are getting stuck in Lululemon’s pipeline, depreciating in value and thinning margins. To deal with this, the company sold $39.2 million worth of discounted merchandise through pop-up stores, warehouse sales, outlets, and the like. Last year, it sold $25.8 million.
To help with that process, over the last year the company has also opened seven more outlets to “ensure liquidation capacity for our growing full price business,” according to CFO Stuart C. Haselden.
Later, he mentioned that the company was going to keep focusing on inventories in order to “maintain the integrity of pricing.”
This is important, because price markdowns can change how customers view the entire Lululemon product. The store used to never have sales – it was a luxury product, basically, and customers expected that.
But the reality of fast fashion and the intrusion of competitors into the athleisure market (Nike, Bandier, Beyonce) have changed all that. Lululemon has to keep up with trends and style changes. That means its inventory pipeline has to speed up, and it has – the company has a whole team on it, and Potdevin gave them a nice shoutout on the call, too.
That speed, though, means that older clothes that are depreciating in value have to be sold off even faster.
“They sell fashion and in-season goods,” Laurent Vasilescu, a retail analyst at Macquarie, said in a phone call with Business Insider. “That puts you in the markdown business” – whether Lululemon likes it or not.
The spirit of the quarter
To be fair, Lululemon did have anan ever-so-slight increase in gross margins. But that was caused by cost-cutting, and it would’ve been healthier if it weren’t “offset with higher markdowns compared to Q1 as final steps to complete the rebalancing of our inventories,” as Haselden said on the call.
So when will we see more?
All Potdevin could say was that the company’s “return to gross margin growth” would be “taking shape in Q2”- which should probably sound familiar to anyone who’s been watching the stock for the last 13 or so quarters.
But, hey, Lululemon has managed to keep its stock price up, partly through $432.2 million in share buybacks, while lowering its capital expenditure.
So maybe that’s what a “great quarter” is really about.
Listen to Business Insider’s Linette Lopez and Josh Barro break down Lululemon on their podcast, Hard Pass, below: