Recently, Lululemon released its third-quarter financial report for 2023. Overall, the company’s performance remains stable, with the Chinese market standing out as a “galloping” force.
In Q3 of this year, Lululemon’s revenue in the Chinese market was approximately $270 million, a year-on-year increase of 53%. Thanks to the rapid development of the Chinese market, Lululemon achieved a total revenue of about $2.2 billion in the third quarter, a year-on-year increase of 19%.
However, alongside the performance growth, Lululemon faces some challenges. Firstly, the previously acquired fitness mirror business is dragging down profits. Secondly, the “middle class” in the United States is reducing clothing spending, leading the company’s fourth-quarter revenue expectations to fall below analysts’ average expectations.
Lululemon expects Q4 revenue to be between $3.14 billion and $3.17 billion, while analysts surveyed by Bloomberg have an average expectation of $3.18 billion.
Focusing on the Chinese market, Lululemon also faces challenges such as consumer stratification and increased competition.
With global growth slowing down, the company continues to intensify its focus on China.
The Chinese market is becoming the “hope of the entire village” for Lululemon.
As of the third quarter of this year, although China is still Lululemon’s third-largest market after the United States and Canada, the proportion of revenue and the growth rate in the Chinese market are significantly higher than in other regions.
In terms of revenue proportion, in the first three quarters of this year, the revenue share of the Chinese market in Lululemon’s total revenue increased from 9.1% in the same period last year to 12.38%. At the same time, the gap between the Chinese and Canadian markets is narrowing. In the first three quarters of this year, Lululemon’s revenue in the Canadian market was $857 million, $63 million more than in the Chinese market. In the same period last year, this data was as high as $300 million.
Looking at the performance of Lululemon in the Chinese market over time, it appears even more impressive.
Looking at the global market as a whole, a noteworthy fact is that Lululemon’s revenue growth has gradually slowed down in the last two years. In the first three quarters of 2022 and 2023, the revenue growth of Lululemon decreased by 12 and 23 percentage points, respectively, compared to 2021.
In the context of a global slowdown in growth, the performance growth of Lululemon in the Chinese market, after a brief decline last year, has returned to a rapid growth trajectory this year.
The importance of the rapidly growing Chinese market to Lululemon is self-evident. Therefore, Lululemon continues to intensify its focus on the Chinese market.
In early November, Lululemon CEO Calvin McDonald made a high-profile announcement at the Fortune China 500 Summit, stating that the company plans to quadruple its international market revenue in three and a half years (by 2026), and the Chinese market will be a crucial part of this.
Opening more and more stores is the best evidence of Lululemon’s increased focus on the Chinese market. At the end of January 2022, Lululemon had 86 stores in the Chinese market, and according to McDonald, as of early November this year, this number has increased to 114.
Not only is the total number of stores increasing, but Lululemon’s “penetration rate” in the Chinese market is also rising. One tangible manifestation is that Lululemon, which originally only opened stores in first-tier cities, has accelerated its expansion into second- and third-tier cities in the past two years. For example, at the end of June this year, Lululemon opened its first store in Shijiazhuang, Hebei Province.
According to data from JiHai Brand Monitoring, Lululemon currently has nearly 30 stores in second- and third-tier cities in China, accounting for more than 20% of the total number of stores.
In addition to offline stores, e-commerce is also an important channel and growth support for Lululemon. In the first three quarters of this year, Lululemon’s e-commerce channel revenue was $2.64 billion, accounting for about 41% of total revenue. In terms of growth, in the third quarter, e-commerce channel revenue increased by 19% year-on-year, 10 percentage points higher than the growth rate of comparable offline stores.
The challenge of the “old king”
Although Lululemon has maintained leading performance growth among its peers in the first three quarters of this year, the company has “hidden concerns.”
Lululemon’s short-term “pressure” comes from an unprofitable deal—the $500 million acquisition of the fitness mirror brand Mirror in 2020.
In the third quarter of this year, due to factors such as the impairment of Mirror assets, Lululemon incurred approximately $74.5 million in expenses. This led to a 2.6 percentage point year-on-year decline in net profit despite revenue growth in the third quarter.
In fact, this is not the first time that Mirror has dragged down Lululemon’s profits. This brand, which was once highly anticipated by Lululemon, began to experience operational difficulties in 2021. In 2022, Lululemon wrote down $400 million in goodwill and assets for the Lululemon Studio business unit (formerly the fitness mirror Mirror acquired by the company), reducing the company’s net profit by $130 million compared to 2021.
Compared to this short-term burden of Mirror, Lululemon’s longer-term pressure comes from changes in the consumer environment and the competitive landscape of the industry.
According to media reports, in Lululemon’s most important market, the United States, consumers are becoming more cautious, and consumer demand is slowing down. Even Lululemon’s CFO expressed a “cautious attitude” towards the fourth quarter during the performance conference call in the third quarter.
In the rapidly rising Chinese market, the consumption of the middle class is “stratified,” and some people will pay more attention to cost-effectiveness and tend to seek alternatives. In the track of women’s sports and yoga wear, where Lululemon once led, “alternative” brands have already emerged.
For example, MAIA ACTIVE, which has frequently trended on hot searches due to its acquisition by Anta, is considered by some female consumers as an “alternative” to Lululemon. According to media reports, the brand’s annual sales in 2022 have exceeded 500 million yuan.
Like MAIA ACTIVE, there are many brands that focus on women’s sports and yoga wear. In addition to these niche brands, leading comprehensive sports brands such as Nike, Adidas, and domestic brands like Li-Ning have long regarded women’s sports as an important strategic direction. This also means that the track of women’s sports is becoming more crowded, and the competition pressure on the “old king” Lululemon is naturally increasing.
In fact, Lululemon is also trying to strengthen its position by focusing on men’s products to become more “comprehensive.” However,
looking at the performance in the first three quarters of this year, its men’s products still seem a bit “weak”: in the first three quarters of this year, men’s products contributed around 23% of Lululemon’s revenue, and their revenue growth was about 3 percentage points lower than that of women’s products.
In a situation where there are more “alternatives,” maintaining the brand positioning and influence of the “old king” Lululemon among male users is a longer-term challenge.