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Lululemon (LULU) Q1 Earnings In Line, Stock Rises on View

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Lululemon Athletica Inc. (LULU - Free Report) confirmed its solid start to fiscal 2016 with first-quarter adjusted earnings of 30 cents per share, which came in line with the Zacks Consensus Estimate and jumped nearly 11.8% year over year. Also, the bottom line came in at the higher end of the company’s 28–30 cents per share guidance range.

Shares of this Zacks Rank #3 (Hold) stock climbed 4.9% following the earnings results and an encouraging guidance for fiscal 2016.

Results were mainly driven by sustained top-line momentum, better-than-expected gross margin and efficient inventory management. However, the bottom line included an unfavorable currency impact of 6 cents mainly due to the strengthening of the Canadian dollar.

Moreover, Lululemon’s quarterly revenues advanced 17% to $495.5 million backed by strong comparable sales (comps) growth as well as expansion of its store base. Also, revenues for the quarter beat the Zacks Consensus Estimate of $488 million. On a constant dollar basis, total revenue increased 19%.

Consolidated comps for the quarter, including in-store comps and direct-to-consumer sales, increased 6%.  In-store comps were up 3%, while direct-to-consumer sales increased 17% to $97.6 million. Moreover, constant-dollar comps increased 8% in the fiscal first quarter, comprising a 5% increase in constant-dollar brick and mortar comps along with an 18% surge in constant-dollar direct-to-consumer sales.

Quarter in Detail

Gross profit rose 16% to $239.1 million in the first quarter of fiscal 2016. However, gross margin contracted 30 basis points (bps) to 48.3%, owing to higher product margins that were more than offset by currency headwinds, along with a deleverage in occupancy & depreciation costs. Nevertheless, the fiscal first quarter saw significant progress in the company’s efforts to revive gross margins.

Operating income increased 15% to $57.6 million. However, operating income margin shriveled 450 bps to 11.6% in the quarter.

Store Update

During the fiscal first quarter, the company opened 10 net new company-operated stores, including two in the U.S., one in Asia, one in Australia, and six ivivva. Since first-quarter fiscal 2016, the company has added 57 net new stores, comprising 26 in the U.S.; one in Canada; one in Australia; five in Europe; four in Asia; and 20 ivivva stores.

As of May 1, 2016, the company operated a total of 373 stores. Additionally, the company had 71 showrooms in operation, including 25 new lemon showrooms in North America, 20 internationally and 26 ivivva.

In fiscal 2016, the company expects to open a total of 40 stores, slightly below the previous guidance. Stores openings for the full fiscal will include 11 new international and 12 ivivva stores, with total square footage expanding nearly 12%.

Financials

Lululemon exited fiscal first quarter with cash and cash equivalents of $550 million, inventories totaling $286.2 million, and stockholders' equity of $1,136.2 million.

At the end of fiscal first quarter, the company had bought back nearly $437.2 million worth shares under its total repurchase authorization. Additionally, the company stated that it has completed the repurchase of the remaining $450 million under the buyback plan in early second quarter.

Guidance

With the progress seen in the fiscal first quarter, Lululemon expects gross margin momentum to continue in the ongoing quarter. Also, with the rebalancing work of inventories now complete, the company expects inventory growth at the end of the fiscal second quarter and for the rest of the fiscal year to remain below its forward sales trend.

As a result, the company provided an encouraging guidance for the second quarter and fiscal 2016.

For the fiscal second quarter, Lululemon expects revenues in the range of $505–$515 million, with constant dollar comps growth in the mid single-digits range. With gross margin recovery on track, the company expects second-quarter gross margin to expand nearly 120 bps year over year.

Lululemon anticipates earnings for the ongoing quarter to be in the band of 36–38 cents per share, compared with 34 cents in the year-ago quarter.

For fiscal 2016, Lululemon now anticipates sales to range from $2.305–$2.345 billion, based on expectations of mid single-digits comps growth on a constant dollar basis. Earlier, the company had projected full fiscal sales in the range of $2.285–$2.335 billion, while comps projections were the same.

Earnings for the fiscal year are projected in a band of $2.08–$2.18 per share, or $2.05–$2.15 normalized for the tax and related interest adjustments in the first quarter.

Capital expenditures for fiscal 2016 are expected in the range of $160–$165 million, reflecting new store openings, renovation, relocation capital, and strategic IT and supply chain capital investments as well.

Further, the company believes that it is on track to deliver on the targets of its five-year plan announced at the end of fiscal 2015.

Stocks to Consider

Some better-ranked stocks in the apparel industry include Delta Apparel Inc. (DLA - Free Report) with a Zacks Rank #1 (Strong Buy) and Perry Ellis International Inc. carrying a Zacks Rank #2 (Buy). Another favorably ranked retail-apparel stock is The Children's Place Inc. (PLCE - Free Report) , also holding a Zacks Rank #2.

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