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lululemon (LULU) Stock Dips Despite Q2 Earnings & Sales Beat

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lululemon athletica inc. (LULU - Free Report) reported better-than-expected top and bottom lines in second-quarter fiscal 2020. Moreover, revenues improved year over year, owing to strong e-commerce sales, while adjusted earnings per share declined on higher expenses.

The company remains cautiously optimistic about the second half of fiscal 2020 as the operating environment remains uncertain. However, it believes 2020 will be an inflection point for the company and the retail industry, given the shift in trends to working and sweating at home with an increased focus on healthy living.

It expects its retail business to accelerate on the expansion of e-commerce and digital sweat offerings. Its products crafted with technical innovation and performance fabrics are likely to continue aiding results due to the rise in work from home and versatile lifestyle, owing to the pandemic. Additionally, management expects the recent MIRROR buyout to improve its at-home fitness offerings.

However, management did not issue detailed guidance for fiscal 2020 due to the impacts of the coronavirus outbreak.

Despite the strong results, shares of lululemon slid 6.2% in the after-hours session on Sep 8. Year to date, this Zacks Rank #2 (Buy) stock has gained 51% against the industry’s 10.7% decline.

 

 

Q2 Numbers

lululemon’s adjusted earnings of 74 cents per share in the fiscal second quarter beat the Zacks Consensus Estimate of 56 cents but declined 22.9% from earnings of 96 cents in the year-ago quarter. Despite top-line growth, the company’s earnings were hurt by higher costs and margin declines.

The Vancouver, Canada-based company’s quarterly revenues rose 2.2% to $902.9 million and surpassed the Zacks Consensus Estimate of $857.1 million. On a constant-dollar basis, revenues increased 3%. The company’s top line primarily benefited from strong direct-to-consumer (e-commerce) revenues, which offset the significant decline in revenues at company-operated stores.

lululemon athletica inc. Price, Consensus and EPS Surprise

 

lululemon athletica inc. Price, Consensus and EPS Surprise

lululemon athletica inc. price-consensus-eps-surprise-chart | lululemon athletica inc. Quote

The company’s net revenues at company-operated stores were down 51% year over year to $287.2 million, while direct-to-consumer revenues were up 155% to 554.3 million. On a constant dollar basis, direct-to-consumer revenues rose 157%. Notably, direct-to-consumer revenues contributed about 61.4% of total sales in the fiscal second quarter, whereas its contribution was 24.6% in the year-ago quarter.

Margins

Gross profit inched up 1% to $489.5 million in second-quarter fiscal 2020. However, gross margin contracted 80 basis points (bps) to 54.2% as a 130-bps increase in distribution center-related costs more than offset the 40-bps leverage in product team costs and 30-bps declines in occupancy and depreciation expenses. Meanwhile, product margin was flat year over year, including online warehouse sale, driven by lower product costs and product mix offset by higher markdowns. Moreover, foreign currency negatively impacted gross margin by 20 bps.

SG&A expenses rose 11% to $352.9 million. Moreover, SG&A expenses, as a percentage of sales, expanded 310 bps to 39.1%.

Driven by soft gross margin and higher SG&A expenses, adjusted operating income declined 19% to $135.9 million. Adjusted operating margin contracted 400 bps to 15%.

Store Updates

During the fiscal second quarter, the company opened 17 stores, including eight in North America and nine stores across Asia and Europe. Store openings in Asia and Europe comprised four in Mainland China, three in other markets across Asia and two in Europe. This also marked the opening of its 100th store in APAC. Additionally, the company completed two planned optimizations in the quarter. As of Aug 2, 2020, it operated 506 stores.

Moreover, the company is accelerating its seasonal store strategy. It operated more than 50 seasonal stores in the fiscal second quarter.

In fiscal 2020, the company expects to open 30-35 net new stores. In the second half of fiscal 2020, the company plans to increase to nearly 70 seasonal stores.

Financials

lululemon exited the fiscal second quarter with $1.2 billion in total liquidity, which indicates a strong financial position. This included cash and cash equivalents of $523 million and $697.7 million available under its revolving credit facility. Further, its stockholders' equity was $2,001.1 million as of the end of the fiscal second quarter. Inventories were up 36% to $672.8 million.

During the first half of fiscal 2020, the company generated operating cash flow of $60.1 million.

In the second half of fiscal 2020, it expects inventory levels to further moderate and reflect an increase of 20-30%.

Expectations for 2H FY20

Although the company did not provide guidance for fiscal 2020, it expects revenue trend to improve sequentially in the second half of fiscal 2020. Including the MIRROR buyout, the company expects total revenues to increase mid to high-single digits in the fiscal third quarter and in the high-single to low-double digits in the fourth quarter.

The revenue growth expectations for the second half are based on the current productivity level of 75% at reopened stores and assume no increment in the quarters ahead. In the digital business, revenues are expected to remain higher than the pre-CPVID levels of 20-30% growth. However, digital sales in the fiscal second half are likely to be moderate compared with the second quarter of fiscal 2020 as the majority of the company-operated stores have reopened.

Coming to the MIRROR buyout, the company expects a contribution of more than $150 million to revenues in fiscal 2020.

For gross margin, it expects the metric to improve in the second half from the first half. However, gross margin in the fiscal third quarter is expected to decline on a year-over-year basis. Meanwhile, gross margin for the fiscal fourth quarter is likely to be flat to modestly up compared with the prior-year quarter. Moreover, the company notes that it is on track to deliver $40 million of savings in non-merchandise expenses, which is included in gross margin relative to its original budget.

Further, it expects continued SG&A expenses deleverage in the back half of fiscal 2020 primarily due to investments in select growth initiatives — particularly digital, and as store traffic remains below last year’s levels. Further, the MIRROR buyout will contribute to SG&A expenses deleverage in the fiscal third and fourth quarters. Consequently, it is on track to realize $130 million in gross SG&A savings by the end of the fiscal compared with its original guidance.

Backed by the above factors, the company expects adjusted earnings to decline 10-15% in the fiscal third quarter and increase modestly in the fiscal fourth quarter. Including the MIRROR buyout, adjusted earnings are likely to decline 15-20% in the fiscal third quarter and reflect a modest decline in the fiscal fourth quarter.

For fiscal 2020, the company expects the MIRROR acquisition to be modestly dilutive to earnings at less than 5%.

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