Lululemon Athletica was off to a great start in 2023and China is a big reason why.
The Vancouver-based activewear company reported a strong first quarter and an upbeat forecast for the year ahead, driven in large part by a resurgence in demand from one of its key markets.
Lululemons sales were up 24% to $2 billion, compared to analyst expectations of $1.93 billion. Of this, Chinas revenue alone grew 79% the last quarter versus the same period last year, pointing to the return in the demand for high-end products in the country.
Our Q1 results were strong as guests responded well to our product offering in all our markets across the globe, said Lululemon CFO Meghan Frank in a statement Thursday. A meaningful acceleration in our China sales trend, coupled with lower air freight, contributed to our better than planned financial performance.
Lululemon plans to open 30 to 35 stores internationally, with a majority of those being in China, Frank told analysts. The apparel-makers shares jumped almost 15% in after hours trading Thursday following the results.
Lululemon is just the latest company to be boosted by Chinas appetite for retail spending, including the likes of luxury conglomerate LVMH, whose CFO Jean-Jacques Guiony noted in April that there was a pretty nice pick up in China which bodes well for the rest of the year, according to the Wall Street Journal. The company recorded a jump in quarterly sales for the start of this year, thanks to Chinas rebound.
Chanel, the second largest luxury brand globally, said its retail growth in China was ticking up even as big markets like the U.S. were easing. And the company expects to continue seeing growth as Chinese shoppers slowly begin traveling again.
The most affluent part of the Chinese clientele is the one that is currently travelling, Chanel CFO Philippe Blondiaux told the Financial Times last week. The most limiting factor today preventing a full return of Chinese consumers to Europe is flight capacity.
Chinas economic recovery
The worlds top retail companies had become reliant on spending by consumers in China, which was the largest luxury market until the pandemic kicked in. When COVID-19 restrictions were introduced, stores were shut for a prolonged period and travel was curbed, ending Chinas bull run as a luxury capital, consulting group Bain & Company noted. In 2022, the personal luxury market shrunk by 10% and foot traffic at malls was down 30% to 35%, both of which hurt brand sales.
When Beijing rolled back restrictions a few months ago, the reopening of the Chinese economy brought more business to companies offering upscale goods from bags and jewelry to athletic attire.
In the first two months of 2023, Chinas consumer spending was up 3.5% compared to 2022, returning to growth after months of decline. The luxury market in China is expected to account for 25% of global luxury spending by 2025, according to accounting firm PwC, creating opportunity for high-end retailers. Moreover, luxury spending may be recovering even faster than the Chinese economy itselfthe sales of jewelry, gold and silver was up over 37% in March, according to data from Chinas National Bureau of Statistics cited by the New York Times.
But getting there wont be as easy for China. The bulk of Chinas luxury spending is spurred by people under 40with youth unemployment soaring and economic recovery happening at a slower-than-expected pace, luxury retail spending may not boom the way companies hope.
Consumers holding back
Even though luxury brands typically cater to consumers who remain relatively better off when theres macroeconomic pressure like inflation, a number of retailers have seen discretionary spendingincluding clothes and electronicssuffer in recent months. For instance, clothing brand and Lululemon rival Under Armour cut its annual profit and sales forecast for the year in May citing inflation that was impacting demand and eating into profit margins. It also said consumers were holding back on expenses in the interest of cutting costs.
Similarly, Nordstrom, a retailer offering middle to higher end products, saw that even though its customers were shopping, they were still pulling back expenses.
But Lululemon said it hasnt experienced any change in demand for the last quarter. The company, which was grappling with high inventory pile-up last year, says it is expecting robust sales for the rest of 2023.
In terms of our guests metrics, theyve remained very strong. Weve seen no change in our cohort behavior, in terms of frequency of purchase or engagement, Lululemon CEO Calvin McDonald said.
Lululemon did not immediately return Fortunes request for comment.
