Lululemon Grows On Higher Than Expected Men’s Business, ivivva Businesses, But 2015 Outlook Disappoints

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lululemon athletica

Lululemon Athletica (NASDAQ: LULU) reported its fourth quarter and full year earnings on Thursday, March 26. The company reported a solid set of numbers that confirmed a turnaround from the dip it experienced in 2013. However, the guidance issued by company management for fiscal year 2015 dampened the spirits of investors. The company reported an earnings per share (EPS) of 78 cents for the quarter and $1.66 for the full year. This was slightly above expectations but for 2015 Lululemon forecast an EPS of between $1.85 and $1.90, a figure that is below even 2013 levels, implying a slower growth rate than would have been expected of the retailer.

We have a $61 estimate for Lululemon, which is about 3% below the current market price. We are in the process of revising our estimates to incorporate the latest earnings report.

See our complete analysis for Lululemon

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Summary of Q4 and Full Year Results

In the fourth quarter, Lululemon reported total sales of $602.5 million, a 15% increase compared to the fourth quarter in fiscal 2013. [1] On a currency-adjusted basis, comparable sales were up 8% year-on-year. [2] The company’s sales in the fourth quarter were again driven by the company’s direct-to-consumer(DTC) segment. DTC sales were up 20% on the back of strong growth in e-commerce and other direct-to-consumer initiatives. Sales from brick-and-mortar company-owned stores increased by 5% on a year-on-year basis, which is a respectable performance considering the appreciation of the U.S. dollar over the period. [2]

However, there were a number of points of concern to be found in the earnings numbers. The retailer’s margins suffered over the quarter, with the gross margin falling two percentage points and the operating margin falling by 3.5% to 26.1%. [2] Putting these numbers back into the full-year results, one can gauge just how poor a year the company had. For the full-year, comparable store sales and margins for the company’s store network fell by 1%. [3] Net income fell by a startling 15% for the full year and the company reported a decline in earnings per share even despite taking out one-time charges for tax expenses on repatriated cash and buying back 3.7 million shares. [4] To some extent, the company’s earnings were weighed down by delays in shipments and store openings. The company experienced delays in shipments due to extreme weather conditions on the West Coast and due to the delay in the opening of a flagship store in London, whose opening missed the holiday period and brought in lower sales numbers.

Strong Growth In Mens and Girls Businesses

The company’s core business is still its women’s business and it performed reasonably well in that segment over the quarter. The retailer delivered growth in the high teens in the bottoms category on the back of new silhouettes, styles and colors. But the more significant aspect of this quarter’s results was the growth delivered by the company’s ivivva (Lululemon’s dance based brand for young girls) and men’s businesses. During the quarter, the company saw a strong response to its newly released $128 ABC pants and technical tops such as Rulu fabrics. [4] The men’s business grew by 16% year-over-year for the quarter. [4] Lululemon’s ivivva brand showed strong momentum with its color and texture mix driving sales across multiple styles and categories. For the quarter, sales for the brand grew by 51% and for the full-year the brand grew by 13%. [4]

Outlook for 2015

Lululemon is targeting revenue growth in the mid-single digits for the year 2015. In terms of gross margins, the company is targeting a margin in the high fifties for its North American business in the coming years and in the low fifties for its international business, which will gradually grow to the high fifties as the business continues to scale. [4] The retailer is targeting this growth with modest increase in SG&A, which should grow in the near term and settle near the mid-twenties in the long run. [4] For 2015, the company is targeting a capital expenditure in the range of $130 million to $$135 million on the back of expected investments in strategic IT and supply chain investments, new store openings, and renovations of currently existing stores. [4]

See our complete analysis for Lululemon Athletica here

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Notes:
  1. lululemon athletica inc. announces fourth quarter and full year fiscal 2014 results, Lululemon Investor Relations []
  2. Ref: 1 [] [] []
  3. Lululemon Athletica’s (LULU) CEO Laurent Potdevin On Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, March 2015 []
  4. Ref: 2 [] [] [] [] [] [] []