Yahoo Finance lululemon (LULU) Tops on Q3 Earnings & Sales, Raises FY22 View
lululemon athletica inc. LULU reported strong third-quarter fiscal 2022 results, with revenues and earnings surpassing the Zacks Consensus Estimate and our estimates. The top and bottom lines also improved year over year. The results were driven by the continued business momentum, which led to robust sales.
However, the company ended the quarter with elevated inventory levels compared with the last year. Inventory increased 84.5% year over year as of Oct 30, 2022. The company also outlined its guidance for the fourth quarter and revised its view for fiscal 2022.
Although lululemon reported strong fiscal third-quarter results, its shares declined 7.5% in the after-hours trading session on Dec 8. This can be attributed to management’s commentary on elevated inventory levels at the end of the quarter. LULU’s soft view for the holiday quarter (the fourth quarter of fiscal 2022) also concerned investors’ sentiments.
This Zacks Rank #3 (Hold) company’s shares have risen 6.2% in the past three months against the industry’s decline of 1.6%.
Image Source: Zacks Investment Research
Q3 Details
lululemon’s fiscal third-quarter earnings of $2.00 per share beat the Zacks Consensus Estimate of $1.96 and our estimates of $1.94. The figure also reflected an increase of 23.5% from the adjusted earnings of $1.62 in the year-ago quarter. The company’s adjusted earnings improved 28% on a three-year CAGR basis.
On a GAAP basis, earnings per share (EPS) of $2.00 for the third quarter of fiscal 2022 improved from the $1.44 reported in the third quarter of fiscal 2021 and 96 cents in the third quarter of 2019.
The Vancouver, Canada-based company’s quarterly revenues advanced 28% year over year to $1,856.9 million and surpassed the Zacks Consensus Estimate of $1,806 million and our estimates of 1,782.1 million. Revenue growth was mainly driven by the strong momentum in its business, backed by a favorable response to its products. The company’s net revenues grew 26% in North America and 41% internationally.
Compared with the third quarter of fiscal 2019, net revenues improved 103%, witnessing a three-year CAGR of 27%. On a three-year CAGR basis, revenues improved 24% in North America and 42% internationally.
lululemon’s total comparable sales rose 22% year over year and 25% on a constant-dollar basis. Comps were driven by robust traffic trends in both stores and e-commerce, with more than 25% traffic growth at stores and about 50% growth in e-commerce. On a three-year CAGR basis, traffic was up 9% in stores and more than 41% in e-commerce.
Direct-to-consumer net revenues climbed 31% (up 34% on a constant-dollar basis). In the digital channel, revenues accounted for 41% of the company’s net revenues compared with 40% in the third quarter of fiscal 2021.
Digital revenues amounted to $767 million in the fiscal third quarter. The company’s e-commerce business delivered an impressive performance, with revenues increasing 46% on a three-year CAGR basis.
In the company’s store channel, sales increased 28% year over year and 16% on a three-year CAGR basis. At the store level, comparable store sales increased 14% and 17% on a constant-dollar basis. Management highlighted that store productivity in the third quarter of fiscal 2022 continued to trend above the 2019 level. The company had 99% of its store fleet open in the fiscal third quarter.
Margins
The gross profit improved 25% year over year to $1,038.9 million. However, the gross margin contracted 130 basis points (bps) to 55.9% due to a 40-bps decline in the product margin and 60-bps deleverage from foreign currency.
The product margin in the fiscal third quarter was impacted by increased markdowns and inventory provisions compared with the low levels last year, partly negated by lower air freight expenses. lululemon also witnessed a 30-bps deleverage on fixed costs due to investments in product teams and distribution centers, offset by leverage in occupancy and depreciation expenses. The gross margin expanded 80 bps from the third quarter of fiscal 2019.
SG&A expenses of $684.2 million increased 25.5% from the year-ago quarter. SG&A expenses, as a percentage of net revenues, were 36.8%, down 80 bps from the 37.6% reported in the prior-year quarter due to the leverage in store and other channels on corporate SG&A and on foreign exchange. This was somewhat offset by higher depreciation and amortization.
Income from operations jumped 36.6% to $352.4 million from the $257.9 million reported in the prior-year quarter. The operating margin expanded 120 bps to 19% from the prior-year quarter’s 17.8% and 20 bps from the third quarter of fiscal 2019.
The adjusted income from operations rose 25% year over year in the third quarter of fiscal 2022, while the adjusted operating margin contracted 40 bps.
Store Update
In the fiscal third quarter, the company opened 23 net new stores and completed seven co-located optimizations. As of Oct 30, 2022, LULU operated 623 stores.
Management expects to open 30 net new company-operated stores in the fourth quarter of fiscal 2022. It anticipates opening approximately 79 net new company-operated stores in fiscal 2022 compared with the 75 store openings mentioned earlier.
The store openings in fiscal 2022 are likely to include 45-50 stores in international markets. The total store openings in fiscal 2022 will imply a square footage increase in the low 20% range.
Financials
lululemon exited the quarter with cash and cash equivalents of $352.6 million and stockholders’ equity of $3,039.2 million. At the end of the third quarter of fiscal 2022, the company had $400 million remaining under its committed revolving credit facility.
At the end of the fiscal third quarter, the company’s inventories grew 84.5% to $1,741.7 million. On a unit basis, inventory was up 80%, witnessing a three-year CAGR of 38%.
In-transit inventory increased relative to 2019 and contributed three-percentage points to the three-year unit growth rate. The company noted that the off-season made up for about 45% of its inventory. However, it expects inventory levels to be sufficient to meet consumer demand in the fiscal fourth quarter.
lululemon expects the inventory growth rate at the end of the fiscal fourth quarter to start moderating, representing growth of 60% year over year. It expects unit inventory to increase about 39% on a three-year CAGR basis at the end of the fiscal fourth quarter.
In the third quarter of fiscal 2022, management repurchased 55,000 shares at an average rate of $311 per share. As of Oct 30, 2022, the company had $812 million remaining under its recently authorized $1 billion share repurchase program.
Outlook
For the fourth quarter of fiscal 2022, management anticipates net revenues of $2.605-$2.655 billion, indicating 22-25% year-over-year growth and a 23-24% rise on a three-year CAGR basis. The company expects the fiscal fourth-quarter gross margin to expand 10-20 bps year over year.
The gross margin is expected to gain from a year-over-year increase in the product margin, driven by reduced airfreight expenses, partly negated by persistent currency headwinds and the timing related to its supply-chain investments. The company anticipates markdowns to be in line with the 2019 levels.
Further, lululemon anticipates a 30-50 bps leverage in the SG&A expense rate for the fiscal fourth quarter. Adjusted EPS is projected to be $4.20-$4.30 for the fiscal fourth quarter. The company estimates an effective tax rate of 28.5% for the fiscal fourth quarter.
LULU raised its guidance for fiscal 2022. It anticipates net revenues in the range of $7.944-$7.994 billion compared with the prior mentioned $7.865-$7.94 billion. The revised view represents a three-year CAGR of 26%, higher than the three-year revenue CAGR of 19% leading up to fiscal 2020. The sales view assumes e-commerce growth of 30% relative to that reported in fiscal 2021 and compares with the low-to-mid-20s growth expected earlier.
lululemon anticipates a gross margin decline of 100-140 bps for fiscal 2022 compared with the 100-130 bps decline mentioned earlier. The decline is expected to mainly result from adverse currency rates. Further, higher investments in the distribution center network and more normalized markdowns from the low levels witnessed in the prior year are expected to hurt margins.
For fiscal 2022, LULU expects the SG&A rate to leverage 100-140 bps year over year compared with a decline of 100-130 bps mentioned earlier. The leverage is likely to be driven by increased sales.
The company expects the operating margin for fiscal 2022 to be nearly flat with that reported last year compared with the flat-to-up operating margin expected earlier. lululemon expects an effective tax rate of 28-28.5% for fiscal 2022.
GAAP EPS is projected to be $9.94-$10.04 for fiscal 2022 compared with $9.82-$9.97 expected earlier. Excluding the gain from the sale of an administrative office building, adjusted EPS for the fiscal year is envisioned to be $9.87-$9.97 compared with $9.75-$9.90 expected earlier.
lululemon expects capital expenditure of $630-$655 million for fiscal 2022, suggesting 8% of revenues. This is in line with the company’s power of three X2 initiative’s target of 7-9% of revenues. Earlier, the company predicted a capital expenditure of $610-$635 million for fiscal 2022.
Solid Picks
Some better-ranked stocks to consider are Crocs Inc. CROX, Oxford Industries OXM and PVH Corporation PVH.
Crocs has a Zacks Rank #2 (Buy) at present. Shares of CROX have rallied 15.5% in the past three months. The company has a trailing four-quarter earnings surprise of 18.2%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Crocs’ current-year sales and EPS suggests growth of 51.5% and 23.7%, respectively, from the year-ago reported figures. It has a long-term earnings growth rate of 15%.
Oxford Industries currently carries a Zacks Rank of 2. OXM has a trailing four-quarter earnings surprise of 18.9%, on average. Shares of Oxford Industries have increased 10.3% in the past three months.
The Zacks Consensus Estimate for Oxford Industries’ current financial-year sales and EPS suggests growth of 22% and 31.2%, respectively, from the year-ago period's reported numbers.
PVH Corp currently carries a Zacks Rank #2. PVH has a trailing four-quarter earnings surprise of 22.9%, on average. Shares of PVH Corp have rallied 23.6% in the past three months.
The Zacks Consensus Estimate for PVH Corp’s current financial-year sales and earnings suggests declines of 3.3% and 19.2%, respectively, from the year-ago period's reported figures. It has a long-term earnings growth rate of 10.2%.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
lululemon athletica inc. (LULU) : Free Stock Analysis Report
PVH Corp. (PVH) : Free Stock Analysis Report
Crocs, Inc. (CROX) : Free Stock Analysis Report
Oxford Industries, Inc. (OXM) : Free Stock Analysis Report
