Lululemon cuts guidance, misses sales estimates after botched product launch

Lululemon lowered its guidance and posted its first revenue miss in more than two years on Thursday after it botched a highly anticipated product launch and growth slowed in the Americas. 

The company now expects full-year net revenue to be between $10.38 and $10.48 billion, down from a previous range of between $10.7 billion and $10.8 billion. Lululemon anticipates earnings per share will be in a range of $13.95 to $14.15, down from previous guidance of $14.27 to $14.47.

Here's how company did in its fiscal second quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:

• Earnings per share: $3.15 vs. $2.93 expected
• Revenue: $2.37 billion vs. $2.41 billion expected

Shares rose more than 2% in extended trading after initially falling.

The company's reported net income for the three-month period that ended July 28 was $393 million, or $3.15 per share, compared with $342 million, or $2.68 per share, a year earlier. 

Sales rose to $2.37 billion, up about 7% from $2.21 billion a year earlier. Beyond total sales, Lululemon also missed expectations on comparable sales, which grew 2%, well behind estimates of 5.9%, according to StreetAccount. Comparable sales in the Americas fell 3%.

The trend doesn't appear poised to improve in the current quarter. Lululemon said it expects sales to grow 6% to 7%, worse than the 9.2% growth that analysts had expected, according to LSEG.

However, Lululemon's profit guidance is roughly in line with what Wall Street anticipated. The company said it expects third-quarter earnings per share to be between $2.68 and $2.73, compared to estimates of $2.70, according to LSEG.

During the quarter, Lululemon pulled its Breezethrough leggings, launched in early July, after it received a wave of complaints about the product's unflattering fit.

On a call with analysts, CEO Calvin McDonald addressed the Breezethrough launch and said it was an opportunity for the company to "test and learn." He added the company bought a small amount of product for the launch.

"While guests were excited by the fabric, the design didn't meet their expectations. Listening to our guests is central to who we are and how we grow our brand, and we took the right step of pausing on sales and look forward to reintroducing the fabric in the future," said McDonald. "This decision had a negligible impact on our performance in this quarter."

The botched launch came after the company struggled with other self-inflicted issues with its assortment, including not having the colors and sizes that its core customers desired, which has had an impact on sales in the U.S. During the quarter, sales grew only 1% in the Americas, the company's largest region.

On a call with analysts, McDonald acknowledged Lululemon's women's business has slowed down in the U.S. He said the company has determined the "most significant factor" affecting the segment is a lack of new styles, which has hurt sales of bottoms and the company's online business.

"The newness that we had performed well. We simply did not have enough to inspire her to purchase," he said.

McDonald insisted that the Lululemon brand "remains strong in the U.S. market" and said its men's business continues to grow.

"Guests are looking for our product, coming into our stores and visiting our e-commerce sites," said McDonald.

Lululemon's product challenges follow the departure of its longtime Chief Product Officer Sun Choe, who resigned in May to pursue another opportunity. At the time, the decision weighed on Lululemon's stock over concerns that Choe's department would hurt the company's ability to innovate and keep winning over customers with trendy new fits.

McDonald said the company had a succession plan in place at the time of Choe's departure, and said the company's global creative director, Jonathan Cheung, would report directly to McDonald and oversee product design and innovation.

The company also appointed Nikki Neuburger as its new chief brand and product activation officer, overseeing merchandising, footwear, and product operations. On Thursday, McDonald said he and Neuberger are "pleased" with the new structure, which puts design and merchandising on "equal footing" and "reestablishes the healthy balance that must exist within a product organization."

"The teams are working well together and already in action," said McDonald.

Like other retailers that are seeing demand slow, Lululemon appears focused on what's within its control: operations and efficiency. While the sales picture during the quarter was rougher than expected, Lululemon's profits came in higher than anticipated.

Gross profit grew 9% to $1.4 billion, while its gross margin increase 0.8 percentage points to 59.6% — better than the 57.7% that analysts had expected, according to StreetAccount. Its operating margin and operating income also increased.

Sales jumped 29% in Lululemon's international markets as the company looks to China for growth.