Lululemon Rises 11% on Solid Q1 Earnings and Raised View - Analyst Blog

Shares of Lululemon Athletica Inc. LULU jumped nearly 11% after the company reported solid first-quarter fiscal 2015 results despite the challenges posed by currency headwinds, unfavorable weather and port delays. The company’s top and bottom line results exceeded its own expectations, thereby encouraging management to raise its fiscal 2015 outlook.

Quarterly earnings of 34 cents per share were in line with the Zacks Consensus Estimate as well as the year-ago figure. However, earnings came ahead of the company’s forecast of a range of 31–33 cents per share.

Backed by improved total comparable sales (comps) and addition of new stores, Lululemon’s quarterly revenues advanced 10.1% to $423.5 million, exceeding the Zacks Consensus Estimate of $417.8 million as well as the company’s projection of a range of $413–$418 million.

Total comps grew 6% on a constant dollar basis, driven by a 31% surge in Direct-to-Consumer sales, partly offset by a 1% dip in quarterly comps.

Moreover, Direct-to-Consumer net revenues, which soared 27% to $83.6 million, constituted about 19.7% of the total revenue, compared with a 17.2% contribution in the prior-year quarter.

Quarter in Detail

Gross profit jumped roughly 5% year over year to $205.9 million in the first quarter of fiscal 2015. However, gross margin contracted 230 basis points (bps) to 48.6% owing to greater airfreight expenses incurred to counter port delays at the West Coast, weakening of the currencies in Australia and Canada, occupancy deleverage, and inefficiencies in supply chain networks. This was, however, partially compensated by enhanced product margins.

Selling, general & administrative (SG&A) expenses escalated 9.4% to $137.8 million, while as a percentage of sales, the same contracted 20 bps to 32.5%.

However, the impact of improved gross profit was more than offset by the rise in SG&A expenses, leading the operating income to decline 3% to $68 million. Further, the operating income margin shriveled 210 bps to 16.1%.

Store Update

During the reported quarter, the company opened 14 stores, including 6 in the U.S., 7 Ivivva stores and 1 store in Canada, taking the total store count to 316 by quarter end.

Financials

Lululemon exited the quarter with cash and cash equivalents of $655.9 million, inventories totaling $236.5 million and stockholders' equity of $1,145.0 million.

During the first quarter, the company spent about $20 million to buy back 0.3 million shares.

Capital expenditures during the quarter amounted to $27.9 million. For fiscal 2015, the company expects capital expenditures in the range of $130–$135 million, to be allocated toward store openings, relocations and expenses on IT and supply chain initiatives.

Guidance

Management remains impressed with its robust start to the fiscal, which was marked by improved traffic, constant developments in eCommerce, higher conversions and enhanced brand engagements. Looking ahead, the company intends to remain focused on undertaking investments in innovations, product introductions and enhancement of customer experience to drive growth, and strengthen its position.

Following a solid first quarter, Lululemon upgraded its guidance for fiscal 2015. The company now anticipates sales for the fiscal to range from $2.00–$2.05 billion, compared with $1.97–$2.02 billion projected earlier. This guidance is based on expectations of mid single-digit comps growth on a constant dollar basis. Earnings for the fiscal are now envisioned in a band of $1.86–$1.91 per share, up from $1.85–$1.90 per share expected earlier.

For the second quarter of fiscal 2015, Lululemon expects revenues to be in the range of $440–$445 million, with comps growth in high single digits. Further, Lululemon anticipates earnings for the second quarter to lie in a band of 31–33 cents per share.

Zacks Rank

Lululemon currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include G-III Apparel Group, Ltd. GIII and Guess' Inc. GES, each with a Zacks Rank #1 (Strong Buy), and Columbia Sportswear Company COLM, with a Zacks Rank #2 (Buy).

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