Lululemon, the 'it-girl' athleisure brand, could lose its title in the U.S., but the company might acquire a new one in its latest regional expansion.
Emerging athleticwear and leisurewear brands like Alo Yoga, Skims, and Fabletics have grown incredibly across the U.S. by keeping up with the changing consumer economy through their savvy use of celebrity marketing.
Related: Lululemon fighting to keep the 'it-girl' title away from competition
Although Lululemon reported earnings per share of $3.15, beating analysts' expectations of $2.93 by 7% in Q2 of fiscal year 2024, the company's American sector has suffered a steep decline.
Lululemon's stock declined 1.07% at last check Friday and has decreased 31.6% compared to the same time last year.
Lululemon's top region underperforms in Q2
The Americas is the company's most profitable region, with a strong presence in the U.S. However, due to the region's underwhelming performance in this fiscal year's Q2, a recent territory expansion might soon replace it.
According to Lululemon's Q2 2024 earnings report, the company's total net revenue increased 8% on a constant dollar basis compared to the same period last year.
Even though the Americas had previously reported the most growth, this year's Q2 net revenue increase was primarily generated by Mainland China, Lululemon's newest regional addition.
China had a strong increase of 37%, the most growth out of all territories.
Although Mainland China was successful, the Americas had a different outcome, reporting a 5% decrease in the company's total net revenue.
In Q2 of this fiscal year, the Americas generated net revenue of $1.7 billion, or 73% of the company's total net revenue, a decline from last year's Q2 net revenue of 78%.
The Americas net revenue increased by 2% on a constant dollar basis, but comparable net sales decreased by 2% on a constant dollar basis compared to the previous fiscal year's Q2.
Two different regions, same marketing strategy
Although Lululemon acknowledges the declining numbers in comparable sales and loss in total revenue in the Americas, the company chose to use the same marketing strategy in China.
Unlike its strongest U.S. competitors, who successfully create brand awareness by collaborating with huge celebrities, Lululemon relies mainly on community events and partnerships with local fitness instructors and influencers.
Although the cultures of both regions are very different, this strategy is evidently no longer working for the U.S.
Lack of inventory and size inclusion
The company's rising U.S. competitors focus their product development on the latest fashion trends and inclusivity, yet Lululemon has recently failed to do so.
In July, Lululemon launched Breezethrough, a heat-intensive workout wear line, but had to pause sales soon after its debut because it failed to meet customers' expectations.
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Unlike its competitors' products, this line was anything but inclusive, prompting customers to complain about the unflattering silhouettes and lack of sizing.
According to CEO and Director Calvin McDonald in the Q2 earnings call for 2024, this move negatively impacted the company's gross margin, but they will use it as a learning lesson.
"We saw it as an opportunity to reset and take a different approach in what the new org does by having a stronger balance between design and merch, which will lead to more creative conversations and outcomes," said McDonald.
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The company stated in the earnings call that they had prioritized new inventory throughout the quarter, and Lululemon reported a 14% inventory decline for Q2.
Despite previously promising to work on bringing in more new inventory, Lululemon's CFO Meghan Frank said SG&A spending will be flat compared to last year.
"We are prudently managing our expenses while continuing to invest strategically into our Power of Three x2 road map," said Frank during the earnings call, referring to the company's outlook.
Lululemon's outlook
Lululemon introduced its Power of Three x2 plan, the company's outlook for the rest of 2024 and the following year.
The company intends to focus on newness and innovation with a target of doubling its revenue from $6.25 billion in 2021 to $12.5 billion in 2026.
"I'm excited about the newness and innovation that will be flowing into our upcoming product assortments. While we are disappointed with the recent performance in women's, we see many strengths in our U.S. business" said McDonald.
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