It has been about a month since the last earnings report for Lululemon Athletica inc. LULU. Shares have added nearly 4% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Lululemon Q4 Earnings Miss, Issues Bleak Q1 View
Lululemon Athletica 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.
Lululemon posted adjusted earnings of $1.00 per share, which lagged the Zacks Consensus Estimate of $1.01 but leaped 17.6% from $0.85 earned in the year-ago quarter. Further, the bottom line was within the company’s guidance range of $0.96 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%.
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.
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.
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 $0.25 to $0.27 per share, short of the prior-year earnings figure of $0.30 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.
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
Lululemon Athletica Inc. Price and Consensus
Lululemon Athletica Inc. Price and Consensus | lululemon athletica inc. Quote
At this time, Lululemon Athletica's stock has a strong Growth Score of 'A', though it is lagging a lot on the momentum front with an 'F'. However, the stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for growth investors than value investors.
Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.
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