Lululemon Athletica Inc.
), a leading yoga-inspired athletic apparel and accessories
retailer, posted better-than-expected second-quarter fiscal 2013
results on the back of robust sales growth. The quarterly
earnings per share of 39 cents beat the Zacks Consensus Estimate
of 35 cents but remained flat compared with the year-ago
The earnings of second-quarter fiscal 2012 included a benefit
of 5 cents per share related to retroactive tax adjustment.
Excluding that, Lululemon's earnings for the quarter rose 14.7%
on a year-over-year basis. However, a rise in input and operating
costs, and higher tax rate were the negatives for the
Moreover, due to delay in receiving the deliveries of fall
products at the beginning of third quarter this fiscal, Lululemon
lowered its outlook for fiscal 2013. This gave rise to negative
sentiment among investors, which was later reflected in the
company's share prices decreasing 5.4% to close at $65.29 per
share from the previous day's closing price of $69.02.
Quarter in Detail
In the reported quarter, Lululemon's revenues of $344.5
million was up 21.9% from $282.6 million in the comparable
year-ago quarter and came marginally ahead of the Zacks Consensus
Estimate of $343.0 million. Revenue growth in the quarter was
primarily driven by new store openings, an 8% upside in
comparable-store sales and a 39.4% increase in Direct-to-Consumer
revenues. Direct-to-Consumer revenues of $49.4 million in the
quarter constituted about 14.3% of the total revenue.
Gross profit during the quarter rose 19.4% to $186.0 million
from the prior-year quarter. However, gross margin contracted 110
basis points (bps) to 54.0% compared with 55.1% in the second
quarter of fiscal 2012. This was primarily due to 220 bps fall in
product margin arising from lower mix of high-margin Black Luon
pants and increased inventory reserves. The negative impact on
gross margin was partially offset by a 70 bps fall in occupancy
and depreciation costs and a decline of 40 bps in product and
supply chain costs.
Selling, general & administrative (SG&A) expenses
increased 25.0% to $107.0 million compared with $85.6 million in
the same period of fiscal 2012, while as a percentage of sales,
it rose 80 bps to 31.1%.
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 pertaining to the company's business expansion.
Income from operations rose 12.5% to $79.0 million while as a
percentage of sales, it contracted 190 bps to 22.9%. The
year-over-year contraction in operating margin was primarily due
to lower gross margin and higher SG&A expenses as a
percentage of sales.
During the quarter, the company's tax expenses increased 74.4%
to $23.8 million. The effective tax rate for the quarter was
29.7% compared with 19.1% in the comparable year-ago quarter.
Lululemon exited the second quarter with cash and cash
equivalents of $610.3 million, up 37.4% from the year-ago quarter
level. Inventories at the quarter-end totaled $163.0 million
versus $125.4 million at the end of the year-ago quarter.
Stockholders' equity came in at $979.3 million. In addition, the
company is free from any long-term debts.
In the first two quarters of fiscal 2013, Lululemon generated
about $70.9 million of cash flow from operating activities
compared with $63.5 million during the same period in fiscal
2012. The company incurred capital expenditure of $44.0 million
during the first half of the fiscal mainly on account of opening
new stores, renovation costs as well as expenses related to IT
and head office capital. Moreover, Lululemon intends to make a
capital expenditure of $100.0-$110.0 million in fiscal 2013.
During the reported quarter, the company opened 8 new stores,
bringing the total store count to 226 across North America,
Australia and New Zealand.
Despite reporting better-than-expected top and bottom-line
results for the said quarter, the company lowered its fiscal 2013
outlook due to a soft start of the third quarter on account of
late delivery of fall products.
Lululemon now expects revenues in the fiscal to come in the
range of $1,625.0-$1,635.0 million, down from
$1,645.0-$1,665.0 million forecasted earlier. Management also
expects SG&A expenses as a percentage of revenues to increase
year over year due to lost sales resulting from late deliveries
and increased investments.
Further, the company expects the weighted average shares
outstanding and effective tax rate at the end of the fiscal to be
146 million and 30.0%, respectively. Based on these assumptions,
Lululemon lowered its earnings guidance range to $1.94-$1.97 per
share from the earlier projection of $1.96-$2.01. The Zacks
Consensus Estimate for the fiscal stands at $1.99 per share.
For the third quarter, Lululemon forecasts sales to be between
$370 million and $375 million, with comparable-store sales growth
in the mid single-digit range. Moreover, the company projects
third-quarter fiscal 2013 earnings to be 39-41 cents per share,
based on the forecast of 146.0 million shares outstanding and a
30% tax rate. Currently, the Zacks Consensus Estimate for the
quarter stands at 44 cents per share.
Other Stocks to Consider
Lululemon currently carries a Zacks Rank #3 (Hold). Other
stocks performing well in the apparel/shoe retail space include
Citi Trends, Inc.
L Brands, Inc.
). While Citi Trends carries a Zacks Rank #1 (Strong Buy), both
DSW and L Brands have a Zacks Rank #2 (Buy).
CITI TRENDS INC (CTRN): Free Stock Analysis
DSW INC CL-A (DSW): Free Stock Analysis
L BRANDS INC (LTD): Free Stock Analysis
LULULEMON ATHLT (LULU): Free Stock Analysis
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