Buoyed by a strong top line and efficient cost management, Lululemon Athletica Inc. (LULU), a leading yoga-inspired athletic apparel and accessories retailer, posted solid first-quarter 2012 results. The company’s policy of boosting inventory levels significantly contributed to the rise in its first-quarter revenue and earnings per share, with the company’s spring styles and colors widely accepted by customers.
Lululemon’s first-quarter 2012 earnings of 32 cents per share surged 39.1% from the prior period, beating the Zacks Consensus Estimate of 30 cents per share.
Quarter in detail
Lululemon’s quarterly revenue of $285.7 million registered a 53% increase from $186.8 million in the year-ago quarter. Moreover, quarterly revenue also surpassed the Zacks Consensus Estimate of $272 million. Revenue growth in the quarter mainly rode on a 25% upside in comparable-store sales and 179% rise in Direct-to-Consumer revenue. Direct-to-Consumer revenue of $38.4 million in the first quarter represented about 13.5% in total revenue.
Gross profit during the quarter increased 43% to $157.3 million from the prior period, reflecting a high double-digit growth in its top line. However, gross margin contracted 370 basis points to 55.0% compared with 58.7% in the prior period, primarily due to increased cost of goods sold as a percentage of total revenue.
Operating income increased 41% to $73.1 million compared with $51.7 million a year ago while operating margin contracted 210 basis points to 25.6%.
Balance Sheet
Lululemon exited the first quarter of 2012 with cash and cash equivalents of $424.3 million, an improvement of 62.6% from the end of the first quarter of 2011. Inventories at quarter end summed up to $107.7 million versus $64.4 million last year. Stockholders' equity came in at $673.4 million. Besides, the company is free from any long-term debts.
At quarter end, cash flow from operating activities was $16.0 million compared with $5.7 million at the end of the prior year quarter.
During the first quarter, the company opened six new stores bringing the total store count at the end of the quarter to 180 stores in North America, Australia and New Zealand.
Management Guidance
In the second quarter of 2012, management estimates to generate net revenues of $273 to $278 million. Comps are expected to rise in the low-double digits range in constant currency for the upcoming quarter. Therefore, the company expects its earnings for the second quarter to be in the range of 28 to 30 cents per share. The current Zacks Consensus Estimate stands at 30 cents per share, which is at the higher end of the company’s guidance range. The company also guided shares outstanding of 145.7 million and a tax rate of 36.5% in the second quarter.
For fiscal 2012, management expects revenue in the range of $1.320 billion to $1.340 billion. Based on this assumption, the company anticipates earnings between $1.55 and $1.60 per share for fiscal 2012. Currently, the Zacks Consensus Estimate stands at $1.59 per share, which is towards the higher end of the company’s guidance range. Moreover, the company anticipates shares outstanding of 146.0 million and a tax rate of 36.5%.
Our Take
We believe that Lululemon's strategic initiatives coupled with e-commerce business will boost both its top and bottom lines.
Lululemon mainly competes with Nike Inc. (NKE) and Under Armour Inc. (UA). The company has a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. Currently, we are retaining our long-term ‘Neutral’ recommendation on the stock.
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