Lululemon Surges on Spectacular Q4 Earnings, Guides FY16

Lululemon Athletica Inc. LULU ended fiscal 2015 on a spectacular note with earnings and sales for the holiday-period quarter coming significantly ahead of expectations. Results were mainly driven by sustained top-line growth, focus on gross margin and cleaner inventory. The company expects this optimism to carry into fiscal 2016 as mirrored in management’s heartening outlook for the first quarter and the fiscal year.

Shares of this Zacks Rank #3 (Hold) stock surged 10.7% following the superb earnings results and an encouraging guidance for fiscal 2016.

Lululemon’s fourth-quarter adjusted earnings of 85 cents per share surpassed the Zacks Consensus Estimate of 80 cents and jumped nearly 9% year over year. Also, the bottom line came ahead of the company’s 78–80 cents per share guidance range.

Lululemon’s quarterly revenues advanced 17% to $704.3 million, backed by double-digit comparable sales (comps) growth as well as expansion of store base. Also, revenues for the quarter were significantly higher than the company’s guidance range of $690–$695 million and ahead of the Zacks Consensus Estimate of $692 million. On a constant dollar basis, revenue increased 22%.
 
Total comps grew 11% on a constant dollar basis, driven by a 33% surge in Direct-to-Consumer sales, coupled with a 5% jump in quarterly comps.

Moreover, Direct-to-Consumer net revenue increased 28% to $146.3 million and constituted about 20.8% of the total revenue compared with a 19% contribution in the prior-year quarter.

Quarter in Detail

Gross profit rose 14% to $354.5 million in the fourth quarter of fiscal 2015. However, gross margin contracted 120 basis points (bps) to 50.3%, owing to higher product margins that were more than offset by currency headwinds, along with a deleverage in occupancy & depreciation, and product & supply chain overhead costs.

Operating income increased 6% to $166.3 million. However, the operating income margin shriveled 250 bps to 23.6% in the quarter.

Store Update

During the fourth quarter, the company opened nine net new company-operated stores, including six in the U.S., one in Europe and two ivivva stores. In fiscal 2015, the company added 61 net new stores, comprising 30 in the U.S.; 2 in Canada; 5 in Europe; 3 in Asia; and 21 ivivva stores.

As of Jan 31, 2016, the company operated a total of 363 stores. Additionally, the company had 84 showrooms in operation, including 25 lululemon showrooms in North America, 21 internationally and 38 ivivva.

Financials

Lululemon exited fiscal 2015 with cash and cash equivalents of $501.5 million, inventories totaling $284 million, and stockholders' equity of $1,027.5 million.

During the fourth quarter, the company bought back 2.1 million shares, at an average price of $49.52 each. This brings the total share repurchases for fiscal 2015 to 5 million shares at an average cost of $55.27 per share.

With this, the company has so far completed about $421.5 million of the total share repurchase authorization and has nearly $28.5 million remaining under the program.

Guidance

Going into fiscal 2016, Lululemon remains confident of resuming earnings growth, driven by continued top-line momentum, gross margin improvement and efficient inventory management. As a result, the company provided an encouraging guidance for the first quarter and fiscal 2016.

For fiscal 2016, Lululemon now anticipates sales to range from $2.285–$2.335 billion, based on expectations of mid single-digits comps growth on a constant dollar basis.

Earnings for the fiscal are envisioned in a band of $2.05–$2.15 per share. Capital expenditures for fiscal 2016 are expected to be in the range of $150–$155 million, reflecting new store openings, renovations, relocation capital, and strategic IT and supply chain capital investments as well.

For the first quarter, Lululemon expects revenues in the range of $483–$488 million, with constant dollar comps growth in the mid-single digits range. Lululemon anticipates earnings for the first quarter to be in the band of 28–30 cents per share, compared with 34 cents in the year-ago quarter.

Further, the company believes it is well-positioned for persistent growth and improved profitability over the next five years. By 2020, the company aims to double its revenue to about $4 billion and more than double its earnings.

To achieve these targets, the company has outlined four distinct growth strategies, including product innovation, building store fleet in North America, expanding digital business and international expansion. With more customers turning to online portals, the company expects this channel to account for over one-third of its sales by 2020. With regard to international expansion, the company remains keen on expanding store base overseas and expects its international business, including e-commerce, to account for nearly 20%–25% of the total sales by 2020.

Stocks to Consider

Some better-ranked stocks in the apparel industry include Delta Apparel Inc. DLA, with a Zacks Rank #1 (Strong Buy), and Columbia Sportswear Company COLM and Michael Kors Holdings Limited KORS, each carrying a Zacks Rank #2 (Buy).

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