Lululemon's 'Healthy' Q1 Validates Operational Improvements, Category Growth

Lululemon Athletica inc. LULU reported better-than-anticipated 1Q results, although the 2Q guidance was slightly below consensus.

D.A. Davidson’s Andrew Burns reiterated a Neutral rating on the company, while raising the price target from $70 to $75.

Beat Results

The company reported constant currency combined comps, revenue and EPS ahead of the consensus and the estimates.

“Excluding a $5.6 million tax benefit and related $1.2 million interest expense, EPS would have been $0.30. FX negatively impacted EPS by $0.06,” Burns mentioned.

Related Link: Goldman Sachs On Lululemon: "Valuation Looks Stretched"

Store revenue grew 14 percent year-over-year during 1Q, while direct-to-consumer increased 17 percent and other revenue rose 52 percent.

Gross margin decline 35 bps year-on-year to 48.3 percent, mainly due to FX headwinds, as well as higher occupancy and depreciation costs.

SG&A also increased 32 percent to $181.5 million, driven by a stronger Canadian dollar and greater digital marketing initiatives.

2Q Guidance

Although the 2Q guidance came in marginally below consensus on comp, revenue and EPS, the FY guidance for both revenue and EPS was raised, mostly in line with the consensus.

“In a quarter riddled with retail earnings shortfalls, LULU’s results and inventory progress are encouraging,” Burns stated, while adding “We believe LULU’s report should help stabilize sentiment on the broader athletic category which, in our view, remains a top performing apparel category.”