Lululemon (LULU) Q2 Earnings & Sales In Line, View Strong

Lululemon Athletica Inc. LULU reported second-quarter fiscal 2016 adjusted earnings of 38 cents per share, which came in line with the Zacks Consensus Estimate and leaped nearly 11.8% year over year. Also, the bottom line came in at the higher end of the company’s guidance range of 36–38 cents per share.

Results were mainly driven by sustained top-line momentum, accelerated gross margin growth and efficient inventory management. However, the bottom line included a nominal impact from unfavorable currency movements.

Moreover, this Zacks Rank #3 (Hold) company’s quarterly revenues advanced 14% to $514.5 million and came almost in line with the Zacks Consensus Estimate of $514 million. Top-line growth was backed by strong comparable sales (comps) growth as well as an expansion of its store base, offset by an unfavorable currency impact of 1%. On a constant dollar basis, total revenue increased 15%.

Consolidated comps for the quarter, including in-store comps and direct-to-consumer sales, increased 4%. In-store comps were up 3%, while direct-to-consumer sales increased 6% to $87.4 million. Moreover, constant-dollar comps increased 5% in the fiscal second quarter, comprising a 4% increase in constant-dollar brick and mortar comps along with a 7% increase in constant-dollar direct-to-consumer sales.

LULULEMON ATHLT Price, Consensus and EPS Surprise

LULULEMON ATHLT Price, Consensus and EPS Surprise | LULULEMON ATHLT Quote

Quarter in Detail

Gross profit rose 20% to $254.2 million in second-quarter fiscal 2016. However, gross margin expanded by a substantial 260 basis points (bps) to 49.4%, owing to 360 bps improvement in product margins due to lower product costs and reduced markdowns, offset by unfavorable currency impacts. In all, gross margins gained from the significant progress on the company’s efforts in the last two years toward enhancing its supply chain and sourcing structure, which positions it for global expansion.

Operating income increased 11% to $74 million. However, operating income margin contracted 30 bps to 14.4% on higher SG&A expenses due to increased in-store and support center employee costs and higher investments.

Store Update

During the fiscal second quarter, the company opened six net new company-operated stores, including one in Canada, one in Asia, one in Europe and three ivivva stores. Since second-quarter fiscal 2015, the company has added 43 net new company-operated stores, comprising 17 in the U.S.; one in Canada; one in Australia; four in Europe; three in Asia; and 17 ivivva stores.

As of Jul 31, 2016, the company operated a total of 379 stores. Additionally, the company had 68 showrooms in operation, including 25 Lululemon showrooms in North America, 20 internationally and 23 ivivva showrooms.

During the fiscal third quarter, the company expects to open nine net new stores.

In fiscal 2016, the company expects to open up to 42 stores, up from the previous guidance of 40 stores. Stores openings for the full fiscal will include 11 new international and 12 ivivva stores, with total square footage expanding nearly 12%.

Financials

Lululemon exited fiscal second quarter with cash and cash equivalents of $535.4 million, inventories totaling $277.3 million, and stockholders' equity of $1,156.2 million.

Guidance

Following second-quarter results, the company provided an encouraging guidance for the third quarter and raised its projections for fiscal 2016 sales and earnings.

For the fiscal third quarter, Lululemon anticipates revenues in the range of $535–$545 million, with constant dollar comps growth in the mid single-digits range. Further, with the gross margin inflection seen in the second quarter and the same continuing into the third quarter, the company remains confident of gross margin recovery in the second-half fiscal 2016 and beyond. That said, the company expects gross margin to expand nearly 200–250 bps year over year in the fiscal third quarter.

However, the company predicts SG&A expenses deleverage in the second-half fiscal 2016, but considerably lesser than what was witnessed in the first-half. The company anticipates about 100 bps of SG&A deleverage, on a combines basis, for fiscal third and fourth quarter. Of this, deleverage is expected to be slightly higher in the third quarter and slightly lower in the fourth quarter. This outlook reflects higher investments in merchandising and brand strategies as well as increased digital and IT costs related to the company’s omni-channel strategies.

Lululemon anticipates earnings for the third quarter to be in the band of 42–44 cents per share compared with 35 cents in the year-ago quarter.

For fiscal 2016, Lululemon now projects sales to range from $2.325–$2.350 billion, based on expectations of mid single-digits comps growth on a constant dollar basis. Earlier, the company had projected full fiscal sales in the range of $2.305–$2.345 billion, while comps projections were the same.

Earnings for the fiscal year are projected in a band of $2.11–$2.19 per share, or $2.07–$2.15 normalized for the tax and related interest adjustments during fiscal 2016. Earlier, the company had projected earnings for the fiscal of $2.08–$2.18 per share, or normalized earnings of $2.05–$2.15.

Capital expenditures for fiscal 2016 are estimated in the range of $165–$170 million versus $160–$165 million expected previously. The rise in capital expenditure forecast exhibits new store openings, renovation, relocation capital, and strategic IT and supply chain capital investments as well.

Stocks to Consider

Some better-ranked stocks in the apparel industry include Delta Apparel Inc. DLA, PVH Corp. PVH and Ralph Lauren Corp. RL, each carrying a Zacks Rank #2 (Buy).

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