Shares of leading yoga-inspired athletic apparel and accessories retailer, Lululemon Athletica Inc. (LULU), jumped 9.1% as the company posted better-than-expected third-quarter fiscal 2014 earnings and upgraded its fiscal 2014 earnings outlook.
Quarterly earnings of 42 cents per share cruised ahead of the Zacks Consensus Estimate of 38 cents as well as the company’s forecast of 36–38 cents per share, backed by robust online sales. However, earnings slipped 6.7% on a year-over-year basis. Results also benefited from the company’s ongoing strategic move toward product and brand enhancements, and global expansion.
Driven by positive comparable store sales (comps) and store openings, Lululemon’s quarterly revenues advanced 10.4% to $419.4 million, though it missed the Zacks Consensus Estimate of $424 million. Revenues also came in below the company’s previous forecast of $420–$425 million.
Total comparable sales jumped 3% during the quarter on a constant dollar basis, including a 27% increase in Direct-to-Consumer sales, offset partially by a 3% decline in comps.
Moreover, Direct-to-Consumer revenues of $77.2 million in the quarter constituted about 18.4% of the total revenue, compared to 16.3% in the prior-year quarter.
Quarter in Detail
Gross profit climbed 3% to $211.1 million from the prior-year quarter. However, gross margin contracted 360 basis points (bps) to 50.3% in the third quarter of fiscal 2014, owing to a fall in product margin due to unfavorable sales mix, greater input price, weakening Australian and Canadian currency, and inefficiencies in supply chain networks.
Selling, general & administrative (SG&A) expenses increased 15.8% to $129.9 million, while as a percentage of sales, the same expanded 130 bps to 30.9%. Higher SG&A expenses resulted from a rise in operating expenses at new stores as well as higher wages across all stores, increased variable costs for operating the online business and higher expenses at store support centers.
Following this, income from operations declined 12.1% to $81.2 million while as a percentage of sales, it contracted 490 bps to 19.4%.
Other Financials
Lululemon exited the quarter with cash and cash equivalents of $633.6 million, inventories totaling $229.9 million and stockholders' equity of $1085.3 million, compared to $698.7 million, $188.8 million and $1,096.7 million, respectively, at the end of the prior-year quarter.
The company also spent about $73 million to buyback 1.8 million shares in the reported quarter.
Store Update
During the reported quarter, the company opened 19 corporate-owned stores including 15 in the U.S., 3 Ivivva stores and 1 store in Canada, taking the total store count to 289 by the end of the quarter, compared to 247 last year.
Guidance
Lululemon projects fourth-quarter sales in the range of $570–$585 million on the back of low single-digit comps growth. Management expects fourth quarter sales to be affected to an extent of nearly $15 million, owing to delays at the West Coast port, slower store openings and lower Canadian dollar.
The company anticipates fourth-quarter earnings in the 65–69 cents per share range. However, the guidance does not include the impact of planned share repurchases. The current Zacks Consensus Estimate for the same is pegged at 72 cents a share, which is likely to get revised downwards.
Consequently, for fiscal 2014, Lululemon lowered its revenue expectation to a range of $1.77–$1.78 billion with combined comps growth in the low single digits. Earlier, the company had projected revenues of $1.78–$1.80 billion.
However, Lululemon upgraded its adjusted earnings guidance for the fiscal, as it now projects adjusted earnings to lie in a band of $1.74–$1.78 per share, compared to $1.72–$1.77 per share, projected earlier. The current Zacks Consensus Estimate stands at $1.77 per share. Including the one-time tax adjustment related to the planned repatriation, earnings for the year are expected to be in the $1.53–$1.57 range.
Other Stocks to Consider
Currently, Lululemon has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Columbia Sportswear Company (COLM), G-III Apparel Group, Ltd. (GIII), each with a Zacks Rank #1 (Strong Buy) and Hanesbrands Inc. (HBI), with a Zacks Rank #2 (Buy).
Read the Full Research Report on COLM
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Read the Full Research Report on GIII
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