The peak holiday season has set in, and retailers are awaiting a stronger season as the consumer is expected to splurge. Consumer spending in the U.S. is on the high as people are left with more money due to lower gas prices as well as due to lower unemployment rates. With changing tastes and preferences of people and change in fashion trends, demand for athletic apparel has increased.
Therefore, retailers such as Lululemon Athletica (LULU, Financial) are benefiting from this uptrend. It is one of the leading athletic retailers and is expected to do well in the upcoming holiday season. The company’s recently reported third-quarter numbers were also ahead of the Street’s estimates, sending its share prices north. Let us take a closer look.
Strong recovery
Revenue for the quarter jumped 10% to $419.4 million, as compared to the previous year. This was below the analysts’ estimate of $424.8 million. The retailer missed on the estimates mainly because of problems such as, delay in new store openings and a lower Canadian dollar, which affected the top line. Also, West Coast port delays resulted in a decline in revenue. Nonetheless, this was a great recovery from even larger problems earlier.
Earlier, Lululemon had to recall its black luon pants, which were transparent and affected customers’ sentiments. Using low quality material resulted in this loss. However, the company immediately recalled the product and undertook initiatives to overcome it.
Thus, it managed to register a same store sales growth of 3% during the quarter. One of the primary drivers of this increase was the Direct-to-consumer segment. This segment surged a whopping 27%, over last year as online shopping gained popularity. Moreover, this segment makes 18.4% of total revenue as against 16.3% last year.
Furthermore, the gross margin of the company dropped to 50.3% from 53.9% in the prior year. Margins were affected because of higher input costs and unfavorable sales mix. Also, unfavorable currency movements, which affected the top line, resulted in lower margins.
Earnings declined 7% to $0.42 per share, lower than the estimate of $0.38 per share. Huge expenditure related to share buyback was the reason for the drop in the bottom line. Lululemon spent $73 million on repurchasing its shares.
Plans for the future
Since the apparel retailer, mainly caters to women, the retailer now plans to focus on the men’s business. It plans to expand the men’s segment by broadening its portfolio of products.
In addition, the athletic apparel retailer will benefit from the increase in spending on athletic apparel. Athletic apparels are now not only used in gyms but are also worn casually. This has increased the demand for such products.
Conclusive thoughts
Lululemon Athletica is quite famous for its yoga pants and other kinds of apparel. Also, its recovery from the mistake of luon pants was remarkable. It has managed to post a decent quarter and is expected to register better quarters, given the growing demand for such products and the upcoming holiday season. However, the company lowered its outlook for the year, which disheartened the investors. Overall, this athletic apparel retailer should not be jumped onto since the future does not look as bright as expected. One should stay on the sidelines until the company makes its top line rock solid.
