Lululemon Earnings Impress Yet Sink On Lowered Outlook, CFO Retires - Analyst Blog

The troubles for the leading yoga-inspired athletic apparel and accessories retailer, Lululemon Athletica Inc. LULU seem to be multiplying as even the better-than-expected earnings results and a $450 million share repurchase plan failed to impress investors over the company's lowered fiscal 2014 outlook. During yesterday's trading session, the stock crashed 15.91% to its lowest level for the year to $37.00.

Lululemon posted first-quarter fiscal 2014 adjusted earnings of 34 cents per share that cruised ahead of the Zacks Consensus Estimate of 32 cents as well as the company's first-quarter forecast of 31–33 cents per share.

On a GAAP basis, including tax adjustment for the planned repatriation of foreign earnings, the company reported earnings per share of 13 cents, down 59.4% from 32 cents in the prior-year quarter.

Lululemon's revenue of $384.6 million in the quarter rose 11% from $345.8 million in the comparable year-ago quarter and was almost in line with the Zacks Consensus Estimate of $384 million. Revenue growth was driven by a 1% rise in comparable-store sales (comps) on constant dollar basis, including 25% increase in Direct-to-Consumer comps offset partially by a 4% decline in corporate comps.

Moreover, Direct-to-Consumer revenues of $66.0 million in the quarter constituted about 17.2% of the total revenue, marking year-over-year growth of 15.6% from the prior-year quarter.

Despite the better-than-expected first quarter performance, the company came up with a disappointing forecast for the second quarter and slashed its fiscal 2014 guidance as it focuses on transitioning from the demerits of last year's product recall as well as growing international presence.

Lululemon projects second quarter sales in the range of $375–$380 million on the back of low to mid single digits comps growth. The company anticipates second-quarter earnings in the 28–30 cents per share range, forecasting shares outstanding of 146.0 million and a tax rate of 30.2%. However, the guidance does not include the impact of planned share repurchases.

For fiscal 2014, Lululemon now expects revenue in the range of $1.77–$1.80 billion with combined comps growth in the low single digits. Earlier, the company had projected revenue of $1.77–$1.82 billion with combined comps growth in the low to mid-single digits.

Further, the company expects the weighted average shares outstanding and effective tax rate at the end of the fiscal to be 146.3 million and 30.2% (excluding tax adjustment related to planned repatriation), respectively. Based on these assumptions, Lululemon projects adjusted earnings in the range of $1.71–$1.76 per share compared with $1.80–$1.90 per share projected earlier. Including the one-time tax adjustment related to the planned repatriation, earnings for the year are expected to be in the $1.50–$1.55 range. However, guidance for both the periods do not include the impact of planned share repurchases.

Going forward, the company has initiated a share repurchase program in order to enhance shareholder value. Under the program that will extend over the next two years the company plans to buy back $450 million worth of its common stock in the open market from time to time.

Quarter in Detail

Gross profit rose 15% to $195.7 million from the prior-year quarter. However, gross margin expanded 150 basis points (bps) to 50.9% from 49.4% in the first quarter of fiscal 2013. This improvement was primarily driven by the write down of $17.5 million provision in the prior-year results, related to the withdrawal of the Black Luon pants from its stores.

During the quarter, the company gained from a 110 bps decline in markdowns and discounts compared to last year. This was partly offset by a 310 bps decline in product margin primarily related to higher sales mix of lower margin seasonal items and higher raw material cost attached to printed and textured garments as well as duty adjustments that were queued up this quarter.

Selling, general & administrative (SG&A) expenses increased 20.1% to $125.9 million from $104.8 million in the same period of fiscal 2013, while as a percentage of sales it expanded 240 bps to 32.7%. 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 center stemming from salaries, administrative expenses, professional fees and management incentive compensation.

Income from operations rose 5.9% to $69.8 million while as a percentage of sales, it contracted 90 bps to 18.2%. The year-over-year contraction in operating margin was primarily due to higher gross margin, partly offset by increased SG&A expenses as a percentage of sales.

During the quarter, the company's tax expense was $52.5 million compared with $20.1 million last year. This included $30.9 million tied to the repatriation of foreign earnings to fund the share buyback program. Excluding this, the effective tax rate for the quarter was 30.1%, as against 29.8% in the comparable year-ago quarter.

Other Financials

Lululemon exited the year with cash and cash equivalents of $752.0 million, up 27.8% from the year-ago quarter level. Inventories at first quarter end totaled $177.4 million, 23.5% higher than $143.7 million at the end of first quarter of fiscal 2013. Stockholders' equity came in at $1,128.4 million.

In the first quarter of fiscal 2014, Lululemon generated about $71.0 million of cash flow from operating activities compared with $25.1 million during the first quarter of fiscal 2013. The company incurred capital expenditure of $25.4 million in the first quarter mainly for the opening of new stores, renovation of existing stores and expenses related to IT and head office capital.

Store Update

During the reported quarter, the company opened 9 corporate-owned stores including 3 in the U.S., and 1 store each in Australia and UK, and 4 ivivva stores. The company also opened 2 international showrooms during the quarter, 1 each in UK and China, bringing the total showroom count to 9 in Europe and 7 in Asia.

Therefore, the company ended the quarter with 263 corporate-owned stores compared with 218 stores at the end of first quarter fiscal 2013. Additionally, the company operated 76 showrooms at the end of the quarter, including 18 ivivva stores.

Other Developments

Also, Lululemon announced that its Chief Financial Officer John Currie plans to retire by the end of the fiscal year. The company has decided to hire an executive search firm to find a replacement. On this occasion, CEO Laurent Potdevin thanked John for his noteworthy contributions to the success of Lululemon and wished him well in his retirement.

Other Stocks to Consider

Lululemon currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the apparel/shoe retail space include Citi Trends Inc. CTRN, Foot Locker Inc. FL and The Men's Wearhouse Inc. MW. Of these, Citi Trends has a Zacks Rank #1 (Strong Buy) while Foot Locker and Men's Wearhouse carry a Zacks Rank #2 (Buy).

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