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Lululemon's 1Q Earnings Beat

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Lululemon Athletica Inc. (LULU - Free Report) , a leading yoga-inspired athletic apparel and accessories retailer, posted better-than-expected first-quarter fiscal 2013 results on the back of robust sales growth. The quarterly earnings of 32 cents a share beat the Zacks Consensus Estimate by a couple of cents but remained flat compared to the year-ago quarter. We observed that soft margins remained a deterrent in the quarter.

Quarter in detail

Lululemon’s quarterly revenue of $345.8 million was up 21% from $285.7 million in the comparable year-ago quarter and came marginally ahead of the Zacks Consensus Estimate of $345.0 million. Revenue growth in the quarter mainly rode on a 7% upside in comparable-store sales and a 40% increase in Direct-to-Consumer revenue. Direct-to-Consumer revenue of $54.0 million in the first quarter represented about 15.6% of the total revenue.

Gross profit during the quarter increased 9% to $170.7 million from the prior-year quarter. However, gross margin contracted 560 basis points to 49.4% compared with 55.0% in the first quarter of fiscal 2012, primarily due to the $17.5 million write-off on cost of sales related to the pull-back of black luon pants that did not meet standards, offset by improved product margin.

Selling, general & administrative (SG&A) expenses increased 24.5% to $104.8 million compared with $84.2 million in the same period of fiscal 2012, while as a percentage of sales it expanded 90 basis points to 30.3%. The dollar increase in SG&A expenses was mainly due to higher compensation and operating costs related to new store openings, increased labor expenses at existing stores due to higher sales volumes, increased variable operating costs related to the e-Commerce business and higher expenses at the store support center, including salaries, administrative expenses, professional fees, management incentives and stock-based compensation associated with the company’s business expansion.

During the quarter, the company’s operating income declined 9.8% to $65.9 million compared with $73.1 million a year ago. Consequently, operating margin contracted 650 basis points to 19.1%.

Balance Sheet

Lululemon exited the first quarter with cash and cash equivalents of $588.4 million, up 38.7% from the year-ago quarter level. Inventories at the end of the quarter summed up to $143.7 million versus $107.7 million at the end of the year-ago quarter. Stockholders' equity came in at $930.1 million. In addition, the company is free from any long-term debts.

In the first quarter of fiscal 2013, Lululemon generated about $25.1 million of cash flow from operating activities compared with $16.0 million in first quarter fiscal 2012. The company incurred capital expenditures of $21 million during the quarter.

During the reported quarter, the company opened 8 new stores and closed down 1 store, bringing the total store count to 218 in North America and Australia.

Management Guidance

Lululemon forecasts sales to be in the range of $340–$345 million in the second quarter, with comparable-store sales growth expected to come in the 5%–7% range. Moreover, the company projects second-quarter fiscal 2013 earnings between 33 cents and 35 cents per share, based on forecasts of 146.0 million shares outstanding and a 30% tax rate.

For fiscal 2013, the company expects revenue in the band of $1,645 – $1,665 million, up from the earlier forecast of $1,615 – $1,640 million. Earnings per share for the full year are anticipated in the range of $1.96 to $2.01, up from $1.95 – $1.99 per share guided earlier. Full-year earnings are also based on shares outstanding projections of 146.2 million and a tax rate of 30%.

Other Stocks to Consider

Lululemon currently holds a Zacks Rank #3 (Hold). Other stocks performing well in the apparel/shoe retail space include The Children's Place Retail Stores Inc. (PLCE - Free Report) , Gap Inc. (GPS - Free Report) and Stein Mart Inc. . All these stocks carry a Zacks Rank #2 (Buy).

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