Lululemon Rides the Health Wave to Beat Sluggish Sales

The retailer’s revenue jumped 13% to $544.4 million from $479.7 million in the year-ago same period

l1Athletic apparel retailer Lululemon Athletica Inc. (NASDAQ: LULU) reported its Q3 FY16 financial results on December 07th, 2016.

The Vancouver, Canada-based Company, together with its subsidiaries, designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. It operates through two segments: Company-operated Stores and Direct-To-Consumer. The company offers pants, shorts, tops, and jackets for healthy lifestyle and athletic activities as well as fitness-related accessories, including bags, socks, underwear, yoga mats, and water bottles. The company sells its products through its company-operated stores; wholesale channels such as yoga studios, health clubs, and fitness centers; license and supply arrangements; and showrooms, as well as directly to consumers through lululemon.com and ivivva.com e-commerce sites.

As of October 30th, 2016, it operated 389 company-operated stores under the lululemon athletica and ivivva athletica brand names in the US, Canada, Australia, l2New Zealand, the UK, Singapore, Hong Kong, Germany, and Puerto Rico. Read more about Lululemon’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Lululemon’s net revenue jumped 13% to $544.4 million from $479.7 million in the year-ago same period. Total comparable sales, which includes comparable store sales and direct to consumer, increased 7%. Comparable store sales alone grew 4% during the reporting quarter, compared to rival The Gap Inc. (NYSE: GPS), which reported a 3% decline in same-store sales during its most recent quarter. The Company’s lululemon athletica and ivivva athletica brands compete with Gap’s Althleta brand. Direct-to-consumer net revenue jumped 16% to $104 million during the reporting quarter.

The results suggest that Lululemon is overcoming the industry-wide trend of massive discounting and sluggish retail traffic due to the burgeoning number of health-conscious people who prefer athletic casual clothes rather than clothes that are trending or in fashion. This has helped the company insulate itself from fashion swings and seasonal trends. Lululemon is also aiming to garner 40% of its sales from menswear, and is building its presence overseas.

During Q3 FY16, Lululemon’s gross profit jumped 24% to $278.4 million. As a percentage of net revenue, gross profit grew to 51.1% compared to 46.9% in the year-ago period. As a result, income from operations jumped 36% to $93.0 million from $68.2 million in the year-ago same period. As a percentage of net revenue, income from operations rose to 17.1% compared to 14.2% of net revenue in the year-ago period.

Partially offsetting the above increases, Lululemon’s income tax expense increased to $25.3 million from $12.1 million in the year-ago comparable period, and the effective tax rate was 27.0% compared to 18.6% in the previous year’s same quarter. Excluding certain tax and related interest adjustments, the effective tax rate was 31.3% compared to 28.8% in the comparable period last year. Despite the higher tax expenses, robust revenue growth helped spur net income to $68.2 million versus $53.1 million in the year-ago period. Diluted EPS for Q3 FY16 rose to $0.50 compared to $0.38 in Q3 FY15. Excluding the above tax and related interest adjustments, diluted EPS was $0.47 during the reporting quarter versus $0.35 in Q3 FY15.

Other highlights

Cash at hand: The Company ended Q3 FY16 with $480.4 million in cash and cash equivalents compared to $403.4 million at the end of the comparable period last year.

Inventory: Inventories at the end of Q3 FY16 increased by 2% to $364.5 million compared to $357.8 million at the end of the year ago same period.

Store count: The Company ended Q3 FY16 with 389 stores covering a total of 1,144 gross square feet versus 379 stores at the end of Q2 FY16.

l3Share repurchase program: The Company also announced that its board of directors has approved a stock repurchase program for up to $100 million of its common shares in the open market at prevailing market prices. The timing and actual number of common shares to be repurchased will depend upon market conditions and other factors, in accordance with Securities and Exchange Commission requirements.

Guidance for Q4 FY16 and full year FY16

For Q4 FY16, Lululemon expects net revenue to be in the range of $765 million to $785 million, based on total comparable sales in the mid-single digits on a constant dollar basis. Diluted EPS is predicted to be in the range of $0.96 to $1.01.

For full year FY16, Lululemon forecasts net revenue to be in the range of $2.32 billion to $2.34 billion, based on total comparable sales in the mid-single digits on a constant dollar basis. Diluted EPS is expected to be in the range of $2.18 to $2.23, or $2.11 to $2.16, normalized for the tax and related interest adjustments made during the first three quarters of FY16.

Stock Performance

l4Lululemon’s stock ended the day at $69.71, gaining 0.59%, at the close on Monday, December 12th, 2016, having vacillated between an intraday high of $70.03 and a low of $68.75 during the session. The stock’s trading volume was at 2,339,895 for the day. The Company’s market cap was at $9.49 billion as of Monday’s close.

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