Lululemon earnings show ‘the brand is strong’: Analyst

BMO Managing Director Simeon Siegel joins Yahoo Finance Live to discuss second-quarter earnings for Lululemon, consumer demand, competition in the athletic apparel space, inventory, and the outlook for profit growth.

Video Transcript

BRIAN SOZZI: Shares of Lululemon are moving higher after the company beat second quarter earnings estimates. Lululemon was also a rare retailer in that it boosted its outlook for the year, showing that a higher income consumer might not care about inflationary pressures. Joining us now on the phone to break it all down is our friend Simeon Siegel over at BMO Capital Markets. Simeon, always good to see you. Your hot take on the quarter.

SIMEON SIEGEL: Hello, sir. So listen, I think like you said, this has been a tough retail environment. Lulu showed very strong sales. I think there are questions you have to ask about gross margin and inventory. But end of the day, right now, the brand is strong.

BRAD SMITH: How quickly do you expect them to move through some of that inventory, especially considering that this is not a company known for discounting or wooing people in via promotions? And if it has a higher income consumer, then there's less of a propensity to say we need to go out there and promote these deals that we're offering?

SIMEON SIEGEL: Yeah, listen, you know me well. I like looking at the numbers, and I like looking at the stories, and they often deviate. The company suggested last night in the story that qualitatively, they have not changed their approach to marketing-- haven't changed their approach to promotions, rather-- and the customer is still strong. It is worth noting that the discounts-- the gross margin did see 30 basis points of markdown pressure. That's not a lot, but it's more than it was the quarter before, and that's more than it was the quarter before that.

At the end of the day, last quarter, inventory above 70%, this quarter, inventory more than 80%. Those are big numbers. And it really doesn't matter who you are. I mean, that is among the highest inventory growth we have seen. So to your question, how long will it take, it's not going to be quick. If it's quick, it's probably a problem.

BRIAN SOZZI: Simeon, what's the secret sauce here? How much longer can Lululemon continue to put up these numbers, and ultimately, their push to double revenues by, what, 2025 or 2026? It's not like they're the only company out there. They're going up against Nike. I don't even want to put UnderArmour in the mix, but Vuori, a new brand you told me about it. I got a whole closet full of their stuff now. They don't own this market.

SIMEON SIEGEL: Yeah, love the Vuori drop-in. So at the end of the day, you and I have done a lot of work historically over where brands peak. And Lulu has crossed the threshold that most brands normally see their peak. Now, the question is the price point they are charging is much higher. So there's this interesting dynamic where they can sell-- they can generate higher revenues on fewer units. But to your point, they do need to find incremental units.

And so there was an interesting comment thrown out on the call yesterday, where they're throwing out-- I don't remember if he said belt bag or whatever the newest version of your favorite accessory to wear to Disney World, Brian, is at the end of the day, they are bringing in new customers to a lower price point, right? So the belt bag is a cheaper item that Lulu has.

If you recall, if we go back, Michael Kors ended up bringing out a lot of people into their fold by introducing the watch, which was a lower priced entry point. So there's this interesting-- I think they're going to need to straddle this fence very carefully, where it's great to bring in new customers with items that charge less, but you always do run the risk that the incremental customer becomes your deteriorating brand customer.

BRAD SMITH: I would like to say on the bag if we can, Simeon, because I know I've bought a Lulu backpack in the past. And I bought this, I want to say, back in 2019 for about 180 bucks. And so now they're on the call, talking about $200 bags, taking the price up a little bit there. And they already had some $200 larger bags as well.

So should they be shifting more of their focus into-- and they've churned through bags, I think, at a pretty solid clip over these past few years. So there's demand there. Should they be focusing attention on bags, less on shoes, and just saying, you know what? That's what's going to actually get out the door from some of these brick and mortar experiences and off the website as well.

SIMEON SIEGEL: Yeah, so, listen, a $200 bag is probably brand accretive. I was referring over there to the belt bag, which I think is $30 or $40.

BRAD SMITH: Ah.

SIMEON SIEGEL: I don't remember the price. I apologize, but this is the one around your waist. This is, at the end of the day, it's more of an entry level product. It allows you to have the Lulu logo without dropping the Lulu price tag. That is an interesting-- it's always watching brands create entry level prices, as opposed to diffusion entry level brands, is always an interesting back and forth. And it's great at the beginning. You just have to make sure you're a good steward. You don't want all of a sudden, the more lower priced entry level, let's just say, products that take over the mix, the less ABC pants in theory you're going to sell.

Now, I think we're very far from that happening. But it's something you want to watch. And I think the reason you want to watch it is because of your initial point. At the end of the day, when you have such high inventory, inventory sales slow after gross margin. Gross margin and inventory are the leading indicators. We have to remember that. And I'm not saying that this brand is over by any stretch of the imagination. I want to start with this is a strong brand.

What I am saying is I don't think we can dismiss the fact that the quality of sale, that the markdowns did deteriorate, they did add pressure to gross margin on a year over year basis. If that evaporates as the inventory cleans up-- and great, right? Long road ahead. Lulu will continue to push forward. But if it doesn't, we'll look back and realize that last quarter and this quarter were the first signs where the health of the brand started being called into question, where the revenues that they drove were not as easy to grab.

BRAD SMITH: Right, I just want to give a word of appreciation for giving some of that jargon breakdown because, I mean, they said bags on the call. And I was like, all right, sure, I got one of those Lululemon backpacks.

BRIAN SOZZI: Hey, Simeon can do it all. Simeon, thanks so much. Enjoy the US Open. I hope you're wearing the Lululemon gear while you-- you know, I know you're bullish Serena. Simeon Siegel, good to see you. Enjoy your day. Stay cool out there, my man.