Lululemon (LULU) Tops Q3 Earnings, Ups View; Stock Gains

After delivering back-to-back quarters of in-line earnings, Lululemon Athletica Inc. LULU came out with robust results for third-quarter fiscal 2016, wherein both sales and earnings surged year over year and exceeded estimates. Moreover, the company issued a new share buyback plan, which along with an impressive outlook gave a boost to its shares.

Notably, this Zacks Rank #3 (Hold) stock jumped 14.1% in the after-hours trading session following the earnings release. In fact, on a year-to-date basis, the company has completely outperformed the Zacks categorized Textile – Apparel Manufacturing industry with a 14.1% jump, against the industry’s slump of 6.6%.

Q3 Highlights

Lululemon posted adjusted earnings of 47 cents per share, which came ahead of the Zacks Consensus Estimate of 43 cents and leaped 34.3% year over year. Also, the bottom line surpassed the company’s guidance range of 42–44 cents per share.

LULULEMON ATHLT Price, Consensus and EPS Surprise
 

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

Results were mainly driven by sustained top-line momentum, enhanced gross margin and the company’s constant efforts towards achieving its long-term goal of doubling its revenues and more than doubling its bottom line. Notably, Lululemon also gained from reduced product costs and improved supply chain, which has otherwise been an obstacle in the recent years.

Looking at the top line, the Vancouver, Canada – based company’s quarterly revenues advanced 13.5% to $544.4 million and beat the Zacks Consensus Estimate of $542.7 million. Top-line growth was backed by strong comparable sales (comps) growth as well as an expansion of its store base.

Consolidated comps for the quarter, including in-store comps and direct-to-consumer sales, increased 7%. In-store comps were up 4%, while direct-to-consumer sales soared 16% to $104 million. Currency had a negligible impact on third-quarter revenues.  

Quarter in Detail

Gross profit rose 23.9% to $278.4 million in third-quarter fiscal 2016. Moreover, gross margin expanded by a substantial 420 basis points (bps) to 51.1%, thus exceeding the 50% mark for the first time in the last five quarters. The gross margin was fueled by 450 bps improvement in product margins due to better merchandise margins, coupled with 20 bps contribution from favorable currency impact.

Operating income increased 36.4% to nearly $93 million. Further, operating income margin grew 290 bps to 17.1%.

Store Update

During the fiscal third quarter, the company opened 12 net new stores and closed two stores. Since third-quarter fiscal 2015, the company has added 35 net new company-operated stores, comprising 14 in the U.S.; two in Canada; four in Europe; three in Asia and 13 ivivva stores, with one Australian store being closed.

As of the end of the third, the company operated a total of 389 stores and expects to open up to 42 company – operated stores by year end, with total square footage expanding nearly 11.5%. In the fourth quarter, the company plans to open 15 net new stores.

Financials

Lululemon exited fiscal third quarter with cash and cash equivalents of $480.4 million, inventories totaling $364.5 million, and stockholders' equity of $1,204.5 million.

During the first three quarters, Lululemon generated about $97.3 million as cash flow from operating activities, while it spent $34.9 million as capital expenditure.

Moreover, management issued a new share repurchase program, authorizing buybacks of up to $100 million, thus highlighting its confidence in future prospects and commitment toward shareholders.

Guidance

While Lululemon began the fourth quarter with mixed sales, results began to pick up later on account of a strong Black Friday and Cyber Monday, with the positive trends spilling into December. While the company remains optimistic about its holiday season sales, it faces intense competition from other athleisure providers like NIKE, Inc. NKE and Under Armour, Inc. UA. Though management raised its earnings guidance for fiscal 2016, it trimmed its sales view. Also, Lululemon issued a mixed outlook for the fourth quarter.

For the fiscal fourth quarter, Lululemon anticipates revenues in the range of $765–$785 million, with constant dollar comps growth in the mid single-digits range. Further, with the gross margin inflection continuing into the fourth quarter, the company expects gross margin to expand nearly 300 – 350 bps year over year in the fiscal fourth quarter.

However, the company predicts SG&A expenses deleverage of about 150 bps in the fourth quarter of fiscal 2016, reflecting investments in brand strategies as well as increased digital and IT costs related to the company’s omni-channel strategies. Lululemon anticipates earnings for the fourth quarter to be in the band of 96 cents to $1.01 per share, with the Zacks Consensus Estimate being pegged a notch higher at $1.02. The company’s earnings came in at 85 cents a share in the fourth quarter of fiscal 2015.

For fiscal 2016, Lululemon now projects sales to range from $2.320–$2.340, based on anticipations of mid single-digits comps growth on a constant dollar basis. Earlier, the company had projected full fiscal sales in the range of $2.325–$2.350 billion, while comps projections were the same.

Earnings for the fiscal year are now projected in a band of $2.18 – $2.23 per share, or $2.11 – $2.16 normalized for the tax and related interest adjustments during fiscal 2016. Earlier, the company had projected earnings for the fiscal of $2.11–$2.19 per share, or normalized earnings of $2.07–$2.15.

Capital expenditures for fiscal 2016 are estimated in the range of $165–$170 million, which includes new store openings, renovation, relocation capital, and strategic IT and supply chain capital investments as well.

A Stock to Consider

A better-ranked stock in the same industry is Perry Ellis International, Inc. PERY with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Perry Ellis has an average positive earnings surprise of 19.5% in the trailing four quarters, and the company has seen positive estimate revisions in the last 30 days.

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