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Lululemon Reports Solid 2Q

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Lululemon Athletica Inc. (LULU - Free Report) , a leading yoga-inspired athletic apparel and accessories retailer, posted solid second-quarter 2012 results on the back of robust top line growth, significant comparable-store sales increases and lower tax. Lululemon’s second-quarter 2012 earnings of 34 cents per share surged 30.8% from the prior period, beating the Zacks Consensus Estimate of 31 cents per share.

Quarter in detail

Lululemon’s quarterly revenue of $282.6 million registered a 33% increase from $212.3 million in the year-ago quarter. Moreover, quarterly revenue was almost in line the Zacks Consensus Estimate of $283 million. Revenue growth in the quarter mainly rode on a 15% upside in comparable-store sales, 91% rise in Direct-to-Consumer revenue as well as new stores added to the company’s portfolio.

Including the contributions from its e-commerce business, the company reported comparable store sales of 23%.

Direct-to-Consumer revenue of $35.4 million represented about 12.5% of the total revenue. Corporate-owned stores contributed about 81.9% to total revenue, recording revenue of $231.3 million. Other revenue, including wholesale; showrooms; outlets; and until last year, franchised stores, totaled $15.9 million, accounting for about 5.6% of total revenue.

Gross profit during the quarter increased 27.6% to $155.8 million from the prior period, reflecting strong top line growth in the quarter. However, gross margin contracted 240 basis points to 55.1% compared with 57.5% in the prior period, primarily due to increased cost of goods sold as a percentage of total revenue.

Operating income increased 18% to $70.2 million compared with $59.5 million a year ago, while operating margin contracted 320 basis points to 24.8%.

The company’s effective tax rate declined to 29.2% (on an adjusted basis) versus 35.7% in the year-ago quarter, driven by the ongoing impact of the revised intercompany pricing agreements.

Balance Sheet

Lululemon exited the second quarter of 2012 with cash and cash equivalents of $444.3 million, exhibiting an improvement of 67.9% from the end of the second quarter of 2011. Inventory as of July 29, 2012, summed up to $125.4 million versus $88.9 million last year. Stockholders' equity came in at $726.3 million. Besides, the company is free from any long-term debts.

At quarter end, cash flow from operating activities was $63.5 million compared with $19.5 million at the end of the prior-year quarter. Capital expenditures were $26.4 million in the quarter compared with $12.5 million in the year-ago quarter.

During the second quarter, the company opened seven new stores in the U.S., one in Australia and one in New Zealand. This brings the company’s store count at the end of the quarter to 189 versus 151 at the end of the prior-year quarter.

Management Guidance

For the third quarter of 2012, management estimates to generate net revenues of $300 to $305 million, based on a low-to-mid teens percentage growth in comparable store sales. In the upcoming quarter, the company expects to open 8 Lululemon stores in the U.S., 3 in Australia and 1 Ivivva store.

Gross margin for the quarter is expected to come in slightly below 55% due to some deleverage compared to last year, on account of lower product margins. The company expects earnings for the third quarter to be in the range of 34 to 36 cents per share, assuming 145.8 million diluted weighted-average shares outstanding and a 29.5% tax rate.

For fiscal 2012, management expects revenue in the range of $1.345 billion to $1.360 billion. The company anticipates earnings between $1.76 and $1.81 per share for fiscal 2012. Moreover, the company anticipates shares outstanding of 145.8 million and a tax rate of 28.9%.

Our Take

We believe that the company's strategic initiatives coupled with e-commerce business will boost both its top and bottom line.

Lululemon mainly competes with Nike Inc. (NKE - Free Report) and Under Armour Inc. . The company has a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Currently, we are retaining our long-term ‘Neutral’ recommendation on the stock.

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