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Lululemon (LULU) Plunges on Q4 Earnings Miss & Bleak Q1 View

Zacks Equity Research

Lululemon Athletica Inc. LULU posted mixed results for fourth-quarter fiscal 2016, wherein both sales and earnings improved year over year while earnings lagged estimates.  Further, the company’s comps trends have remained weak so far in first-quarter fiscal 2017 on account of soft traffic in stores and lower conversion on the eCommerce site. This led the company to provide bleak outlook for the fiscal first quarter.

Further, shares of this Zacks Rank #3 (Hold) company tumbled 17.5% in the after-hours trading session following the dismal fiscal fourth-quarter earnings and soft first-quarter outlook. On a year-to-date basis too, the company’s stock has declined 16.1%, wider than the Zacks categorized Textile – Apparel industry’s fall of 4.9%.



Q4 Highlights

Lululemon posted adjusted earnings of $1.00 per share, which lagged the Zacks Consensus Estimate of $1.01 but leaped 17.6% from 85 cents earned in the year-ago quarter. Also, the bottom line was within the company’s guidance range of 96 cents to $1.01 per share.

The year-over-year improvement can be attributed to the sustained top-line momentum, enhanced gross margin and the company’s constant efforts toward achieving its long-term goal of doubling revenues and more than doubling the bottom line.

Looking at the top line, the Vancouver, Canada-based company’s quarterly revenues advanced 12% to $789.9 million and beat the Zacks Consensus Estimate of $785 million. On a constant dollar basis too, revenue increased 12%. Top-line growth was backed by strong comparable sales (comps) growth as well as an expansion of store base.

Consolidated comps for the quarter, including in-store comps and direct-to-consumer sales, increased 6%. In-store comps were up 6%, while direct-to-consumer sales advanced 12% to $164.3 million. On constant-dollar basis, comps improved 7%.

Quarter in Detail

Gross profit rose 21% to $427.9 million in fourth-quarter fiscal 2016. Moreover, gross margin expanded by a substantial 390 basis points (bps) to 54.2%. The gross margin was fueled by 410 bps improvement in product margins due to lower unit costs and better average unit retail, better merchandise margins along with a favorable currency impact.

Driven by a solid holiday season, improved comps and higher gross margins, operating income increased 18% to nearly $196.6 million. Further, operating income margin grew 130 bps to 24.9%.

Store Update

During the fiscal fourth quarter, the company opened 17 net new company-operated stores. This included nine stores in North America, four in Asia, two in Australia and New Zealand, one in Europe and one ivivva store.

As of the end of fiscal 2016, the company operated a total of 406 stores. Additionally, it operated a total of 51 showrooms, including 16 Lululemon showrooms in North America, 18 internationally and 17 ivivva showrooms as of the end of fiscal 2016.

In fiscal 2017, the company expects to open up to 50 new company-operated stores, with total square footage expanding nearly 12%. Of the stores planned for the fiscal, about 15 are expected to be opened in international locations. This reflects the company’s plan of speeding up of international store openings.

Financials

Lululemon exited fiscal 2016 with cash and cash equivalents of $734.8 million and stockholders' equity of $1,360 million. Inventories increased 5% to $298.4 million.

In fiscal 2016, Lululemon generated about $385.1 million as cash flow from operating activities. Further, the company spent $43.3 million as capital expenditure in the fiscal fourth quarter.

In the quarter, the company bought back only minimal amount of shares under its recent authorization of $100 million.

Guidance

Going into fiscal first-quarter 2017, Lululemon notes that soft traffic in stores and lower conversions on its eCommerce site have resulted in weak trends so far in the quarter.  Owing to these factors, the company provided soft guidance for the fiscal first quarter. However, the company outlined a decent outlook for fiscal 2017.

For the fiscal first quarter, Lululemon anticipates revenues in the range of $510–$515 million, with constant dollar comps expected to decline in the low single-digits range. Further, the company expects gross margin to expand nearly 50 bps year over year in the fiscal first quarter. While the persistence of product margin improvements achieved in second half fiscal 2016 are expected to boost gross margin, a deleverage in product and supply chain costs, and occupancy and depreciation expense due to the bleak sales trend in the fiscal first quarter will hurt results.

However, the company predicts SG&A expenses deleverage of about 100–150 bps in first-quarter fiscal 2017, based on the soft comps trends. Lululemon anticipates earnings for the fiscal first quarter to be in the band of 25 cents to 27 cents per share, much lower than the current Zacks Consensus Estimate of 39 cents. Further, the guidance is short of the company’s prior-year earnings figure of 30 cents per share.

For fiscal 2017, Lululemon now projects sales to range from $2.55–$2.60 billion, based on low single-digits comps growth on a constant dollar basis. This growth reflects strengthening of eCommerce and store trends driven by the company’s strategies focused on product assortment improvements, website enhancements and acceleration of omni-channel model.

The company expects gross margin to remain flat with fiscal 2016 level backed by solid product margin improvements in the fiscal first half, which will moderate in the second half. This will be offset by higher product and supply chain costs as well as increase in occupancy and depreciation expenses due to increased opening of international stores that carry higher occupancy.

Further, the company also expects SG&A expense and operating margin to remain flat year over year. Earnings for the fiscal year are now projected in a band of $2.26–$2.36 per share.

Capital expenditures for fiscal 2017 are estimated in the range of $170–$175 million, which includes new store openings, renovation, relocation capital, and strategic IT and supply chain capital investments as well.

lululemon athletica inc. Price, Consensus and EPS Surprise

 

lululemon athletica inc. Price, Consensus and EPS Surprise | lululemon athletica inc. Quote

Stocks to Consider

Better-ranked stocks in the Consumer Discretionary space include Masonite International Corporation DOOR, Adidas AG ADDYY and SodaStream International Ltd. SODA, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Masonite International has gained 21.1% year to date. Further, the company’s estimates for the current fiscal have seen positive estimate revisions in the last 30 days.

Adidas, with a long-term earnings growth rate of 26.1%, has gained 22.1% in the year-to-date period.

SodaStream has jumped nearly 19.9% year to date. Also, it has a long-term earnings growth rate of 7.5%.

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