Lululemon Presents Upbeat Q4 Earnings

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Mar 27, 2015
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Lululemon Athletica (LULU, Financial) recently revealed its fourth quarter earnings for fiscal 2014, with a 16% year-over-year growth in revenues to $602.5 million. Although net income grew by only 1% to $110.9 million compared to the year-ago figure, the company logged EPS of 78 cents a share, beating the consensus estimate by 5 cents. The yoga apparel company attributed the upbeat results to improving trends and strong holiday sales, with customers responding well to its range of offerings for both men and women. Following the results, Lululemon shares climbed to a high of $68.89, a shade short of its standing 52-week high of $68.99, before closing at $63.97.

Robust Web-Sales Boosts Revenues, but Margins Disappoint

Lululemon reported net revenue of $602.5 million for the fourth quarter, compared to $521.0 million in the year-ago quarter, on the back of an 8% increase in total comparable sales on a constant dollar basis. While comparable-store sales for the quarter grew 5% year-over-year, net revenue from the company’s direct-to-customer or e-commerce segment grew 17% to $114.5 million. Lululemon also logged gross profit of $310 million, up 11% year-over-year, but margins fell from 53.5% of net revenue in Q4 2013 to 51.5%. With income from operation also increasing 2% year-over-year to $157.2 million, the company reported net income of $110.9 million or 78 cents a share compared to the prior-year quarter’s $109.7 million or 75 cents a share.

For the full fiscal 2014, Lululemon reported net revenues of $1.8 billion, up 13% from the previous fiscal’s $1.6 billion. While total comparable sales increased 3% for the fiscal on a constant dollar basis, comparable-store sales fell 1%. However, the company saw net revenue at its e-commerce segment growing by a significant 22% during the fiscal to $321.2 million. Gross profit for fiscal 2014 stood at $914.2 million, up 9% compared to $840.1 million during the previous fiscal, but margins were down from 52.8% in FY2013 to 50.9% in terms of percentage of net revenues. The company’s income from operations also decreased 4% to $376.0 million compared to $391.4 million in FY2013. Excluding certain tax-related expenses, Lululemon’s diluted EPS stood at $1.89 a share, while inclusive of the tax component, diluted EPS dropped to $1.66 a share.

During fiscal 2014, Lululemon, which competes with Adidas AG (ADDYY), Nike Inc. (NKE) and The Gap, Inc. (GPS) in the sports apparel retail market, bought back 3.7 million shares of the company’s common stock at an average price of $40.31 a share.

Outlook for Fiscal 2015

Lululemon also revealed its guidance for fiscal 2015, with net revenues for the year projected in the $1.97-$2.02 billion range and EPS of $1.85-$1.90 per share. Consensus estimates had pegged the profit at $2.06 a share on revenues of $2.05-billion. The company, which had previously called 2015 an investment year, also expects capital expenditures to increase during the fiscal, reflecting higher costs of new store launches, IT spending and other factors.

For the first quarter of the new fiscal, the company projected revenues of $413-$418 million, way below the consensus estimate of $442 million, leaving investors disappointed. EPS for the Q1 2015 is projected to come in at 31-33 cents a share, which again falls short of the consensus estimate of 39 cents. However, the company management said that the weak outlook was largely due to temporary West Coast port delays, with a meaningful portion of Lululemon’s inventory being delayed by three weeks or more, and currency headwinds.

Final Thoughts

Lululemon reported strong revenues for both Q4 and full fiscal 2014. However, the company is grappling with falling profit margins with gross margin declining two percentage points and operating margins dropping 3.5 percentage points to 26.1%. Investors are also disappointed with the company’s weaker-than-expected outlook for fiscal 2015, although the setback appears to be temporary. Experts foresee the company’s earnings grow at an average annual rate of around 16% over the next five years. The Lululemon stock is up 13% year-to-date and currently carries a ‘buy’ guidance.