Lululemon Athletica Inc. (LULU – Free Report) delivered a robust third-quarter fiscal 2017 results, with both sales and earnings surpassing estimates and also improving year over year. While this marked the company’s third consecutive earnings beat, sales topped estimates for the eighth straight quarter.
Results were driven by consumers’ favorable response to Lululemon’s product innovations, solid direct-to-consumer (“DTC”) sales, focus on supply chain initiatives and the company’s commitment to its long-term strategy. Further, the company is on track with the remodeling of its ivivva business into an online brand, as announced in June.
Consequently, this Zacks Rank #3 (Hold) stock jumped nearly 6.8% in the after-hours trading session on Dec 6, following the splendid results and outlook. Further, the company’s shares have witnessed an 8.6% rise in the last three months, surpassing the industry’s 2.8% growth.
Lululemon posted adjusted earnings of 56 cents per share, beating the Zacks Consensus Estimate of 52 cents and rose 19.1% year over year. Moreover, the bottom line comfortably surpassed the company’s guidance range of 50-52 cents per share. Including the effect of ivivva’s restructuring, earnings declined 14% year over year to 43 cents per share.
Looking at the top line, the Vancouver, Canada-based company’s quarterly revenues advanced about 14% to $619 million, ahead of the Zacks Consensus Estimate of $611.5 million. On a constant dollar basis, revenues increased 12%. The improvement can be attributed to new store openings, as well as strong e-commerce growth.
Further, foreign currency tailwinds bolstered revenues by $6.8 million in the quarter, while it bore nearly $2.5 million impact from the hurricanes which hit the United States recently.
Total comparable store sales (comps), including in-store comps and direct-to-consumer sales, grew 8% while constant-dollar comps were up 7%. In-store comps were up 2% (up 1% in constant dollars basis), while DTC comps surged 26% (an increase of 25% in constant dollars). Comps growth at DTC stemmed from double-digit increases in traffic and transactions, alongside solid conversions this year. With continued progress on its e-commerce strategy, the company remains on track to deliver $4 billion in revenues by 2020.
Adjusted gross profit rose 16% to $323.1 million in third-quarter fiscal 2017. Moreover, adjusted gross margin expanded 110 basis points (bps) to 52.2% exceeding management’s expectations. The gross margin was fueled by 70 bps improvement in product margins backed by favorable mix and reduced product costs, somewhat negated by modestly higher markdowns.
Further, the quarter was marked by a 20 bps gain from foreign currency and 20 bps leverage in occupancy, depreciation and product and supply chain costs, which came in better than expected.
Adjusted operating income increased 16% to nearly $107.8 million, while the operating margin expanded 30 bps to 17.4%. Operating margin included 60 bps impacts from costs related to e-commerce development.
During the quarter under review, the company opened 17 new stores and closed 50 stores, mainly related to the ivivva remodeling. As of the end of third-quarter fiscal 2017, the company operated a total of 388 stores.
For fiscal 2017, the company targets opening 46 company-operated stores, with about 16 expected to be opened in international locations.
Lululemon exited the quarter with cash and cash equivalents of $650.1 million and stockholders’ equity of $1,421.3 million. Inventories were up 9%, at $396.9 million.
As of Oct 29, 2017, Lululemon generated about $131.3 million as cash flow from operating activities. Further, the company spent $57 million as capital expenditure in third-quarter fiscal 2017 mainly related to higher IT investments and new store capital.
During the quarter, the company bought back 0.1 million shares at an average price of $60.27 per share. This marked the completion of the company’s existing $100 million buyback plan that commenced in December 2016. Additionally, the company authorized a new share repurchase plan for up to $200 million worth of shares.
ivivva Strategy on Track
In June, Lululemon announced plans to develop ivivva, its activewear brand, into an e-commerce focused business, with only eight ivivva stores operating across North America. The company revealed plans to close about 40 of the total 55 ivivva stores and convert nearly half of the remaining stores into Lululemon branded stores.
In third-quarter fiscal 2017, Lululemon recognized pre-tax charges of $22.2 million with regard to the ivivva restructuring plan. The company now anticipates incurring pre-tax costs of about $45-$50 million for fiscal 2017, down from the previous estimate of $50-$60 million. The estimated charges include $45.4 million already recognized in the three quarters of fiscal 2017. These charges are mainly associated with long-lived asset impairment and lease termination expenses.
The Road Ahead
Lululemon remains on track with efforts to build upon its supply chain network and e-commerce business. With regard to e-commerce, the company is progressing with further developing the processes put in place in the first and second quarters, including improved photography, more spontaneous merchandising and disciplined planning. These efforts helped the company receive favorable response from shoppers, without having to proceed with the previously planned launch of a new website. Moreover, the company anticipates these process improvements to aid double-digit growth for digital business in the fourth quarter, and into 2018 and beyond.
Driven by the favorable third-quarter results and momentum across business channels since the start of the fourth quarter, the company provided an encouraging view for the fourth quarter and raised guidance for fiscal 2017.
Backed by the incredible enthusiasm for the holiday season, the company witnessed an improvement in store traffic in both the United States and Canada through the first five weeks of the fiscal fourth quarter. To gain from the increased traffic and satisfy holiday shoppers, the company has opened 22 pop-up seasonal stores in the high traffic areas and malls. This will help in capturing really good business during the holiday season.
For fourth-quarter fiscal 2017, Lululemon anticipates revenues in the range of $870-$885 million, with constant dollar comps expected to increase in mid-single digits range. The company projects normalized gross margin to improve 100 bps compared with the year-ago quarter. Management anticipates SG&A expense leverage of about 50-100 bps as it has nearly completed the expansion of digital business.
Lululemon envisions normalized earnings (excluding the impact from ivivva’s restructuring) for the fourth quarter to lie in a band of $1.19-$1.22 per share. On a GAAP basis, earnings are anticipated to be in the range of $1.18-$1.21 per share.
Raised FY17 View
For fiscal 2017, Lululemon now projects sales to range from $2.590-$2.605 billion, up from the previous forecast of $2.545-$2.595 billion. The guidance is based on mid-single digits comps growth on a constant dollar basis, compared with the previous forecast of low-single digits comps growth. The company’s guidance includes the planned closure of ivivva stores and the related reduction in revenues.
The company expects normalized gross margin expansion of 100-150 bps year over year in fiscal 2017, up from the old forecast of 100 bps increase. This will be backed by product margin enhancements and benefit of mix.
The company anticipates SG&A expense to deleverage 100 bps compared with the previous forecast of 50-100 bps increase. This primarily includes digital investments made during the year, accounting for nearly 50 bps increase. Normalized earnings for the fiscal year are now projected in a band of $2.45-$2.48 per share, up from the previous range of $2.35-$2.42. GAAP earnings are likely to come in the range of $2.20-$2.23 per share.
Capital expenditures for fiscal 2017 are now estimated to be nearly $170 million, compared with the prior guidance of $175-$180 million. Capital expenditures mainly include new store openings, renovation, and relocation capital, along with strategic IT investments.
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