Lululemon Athletica Inc. LULU posted soft third-quarter fiscal 2015 results, wherein both the top and bottom lines fell short of estimates, which led management to provide a bleak outlook for the fourth quarter and fiscal 2015. Shares of this Zacks Rank #4 (Sell) stock plunged 13.1% after the earnings announcement.
Lululemon’s third-quarter adjusted earnings of 35 cents per share missed the Zacks Consensus Estimate of 37 cents and plunged 16.7% year over year. The bottom line, however, met the lower end of the company’s 35–37 cents per share guidance range.
Including one-time items, earnings per share came in at 38 cents, compared with 42 cents reported a year ago.
Lululemon’s quarterly revenues advanced 14% to $479.7 million, backed by strength in its eCommerce and store network. Though sales were within the company’s guidance range, the figure came in below the Zacks Consensus Estimate of $481.6 million.
Total comparable sales (comps) grew 9% on a constant dollar basis, driven by a 21% surge in Direct-to-Consumer sales, coupled with a 6% jump in quarterly comps.
Moreover, Direct-to-Consumer net revenue increased 16% to $89.3 million and constituted about 18.6% of the total revenue compared with an 18.4% contribution in the prior-year quarter.
Quarter in Detail
Gross profit rose 7% to $224.8 million in the third quarter of fiscal 2015. However, gross margin contracted 340 basis points (bps) to 46.9%, owing to lower product margins, partially offset by enhanced air freight usage.
The impact of improved gross profit was more than offset by the rise in SG&A expenses, leading operating income to plunge 16% to $68.2 million. Further, the operating income margin shriveled 520 bps to 14.2% in the quarter.
Store Update
During the reported quarter, the company opened 18 stores, taking the total store count to 354 by quarter end.
Financials
Lululemon exited the quarter with cash and cash equivalents of $403.4 million, inventories totaling $357.8 million, and stockholders' equity of $1,059.6 million.
During the third quarter, the company bought back 1.6 million shares, at an average price of $55.50 each.
Guidance
Management stated that the company began the fourth quarter on a mixed note due to slow consumer traffic, partly compensated by improvement witnessed during Thanksgiving. Given the soft performance in the third quarter, current macroeconomic scenario and ongoing currency headwinds, management provided a conservative outlook for the fourth quarter and fiscal 2015.
For fiscal 2015, Lululemon now anticipates sales to range from $2.025–$2.040 billion, compared with $2.025–$2.055 billion projected earlier. This guidance is based on expectations of high single-digit comps growth on a constant dollar basis.
Earnings for the fiscal are now envisioned in a band of $1.81–$1.84 per share. Accounting for tax and other related adjustments, earnings are expected in the range of $1.78–$1.81 per share. Earlier the company had projected earnings per share in the range of $1.87–$1.92.
For the fourth quarter, Lululemon expects revenues in the range of $670–$685 million, with comps growth in mid-single digits. Lululemon anticipates earnings for the fourth quarter to be in the band of 75–78 cents per share, much below the current Zacks Consensus Estimate of 86 cents.
Going forward, management intends to remain focused on undertaking investments in innovations, product introductions and enhancement of customer experience to drive growth, and strengthen its position. The company is encouraged by the progress of its global expansion plans and remains optimistic about its brand-building initiatives, worldwide.
Zacks Rank
A better-ranked stock in the same industry is Hanesbrands Inc. HBI, with a Zacks Rank #2 (Buy). Better-ranked stocks in the related apparel/shoe industry include Abercrombie & Fitch Co. ANF and American Eagle Outfitters Inc. AEO, each sporting a Zacks Rank #1 (Strong Buy).
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