Lululemon’s Comps Jump on Better Merchandising Mix

Retailer’s revenue jumped 14% to $514.5 million in Q2 FY16

l1Athletic apparel retailer Lululemon Athletica Inc. (NASDAQ: LULU) reported its Q2 FY16 financial results on September 1st, 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 consumer through lululemon.com and ivivva.com e-commerce sites.

As of January 31st, 2016, it operated 363 company-operated stores under the Lululemon Athletica and ivivva Athletica brand names in the U.S., Canada, Australia, New Zealand, the U.K., Singapore, Hong Kong, Germany, and Puerto Rico. Read more about Lululemon’s financial results below.

Q2 FY16 financial highlights

l2During Q2 FY16, Lululemon’s net revenue jumped 14% to $514.5 million from $453.0 million in the year-ago period. On a constant dollar basis, net revenue grew 15% during the reporting quarter. Total comparable sales grew 4%, and 5% on a constant dollar basis. For Company-operates stores, comparable store sales rose 3% and by 4% on a constant dollar basis. Direct-to-consumer net revenue grew 6% to $87.4 million, and by 7% on a constant dollar basis. In the year-ago period, the Company held an online warehouse sale. Excluding the impact of the online warehouse sale, direct to consumer net revenue would have risen 16% during the reporting quarter.

In Q2 FY16, Lululemon’s gross profit jumped 20% to $254.2 million. As a percentage of net revenue, gross profit grew to 49.4% compared to 46.8% in the year-ago period. As a result, income from operations jumped 11% to $74.0 million from $66.6 million in the year-ago period. As a percentage of net revenue, income from operations was slightly lower at 14.4% compared to 14.7% of net revenue in the year-ago period.

During Q2 FY16, Lululemon’s income tax expense was $20.9 million, which included a net income tax recovery of $1.9 million related to the Company’s transfer pricing arrangements and the associated plan to repatriate foreign earnings. In addition, there was a related net interest expense of $0.3 million. Higher revenues and gross profits helped spur net income to $53.6 million versus $47.6 million in the year-ago period. Diluted EPS for Q2 FY16 rose to $0.39 compared to $0.34 in the year-ago period. Excluding the above tax and related interest adjustments, diluted EPS was $0.38 for Q2 FY16.

Other highlights

Cash at hand: The Company ended Q2 FY16 with $535.3 million in cash and cash equivalents compared to $541.3 million at the end of the year-ago period.

Inventory: Inventories at the end of Q2 FY16 decreased by 1% to $277.3 million compared to $280.6 million at the end of the year-ago period.

Store count: The Company ended Q2 FY16 with 379 stores covering a total of 1,117 gross square feet.

l3Share repurchases: During Q2 FY16, Lululemon repurchased 0.2 million shares of its common stock at an average cost of $63.65 per share, completing its approved stock repurchase program.

Guidance for Q3 FY17 and full year FY17

For Q3 FY16, Lululemon expects net revenue to be in the range of $535 million to $545 million based on total comparable sales in the mid-single digits on a constant dollar basis. Diluted EPS is forecast to be in the range of $0.42 per share to $0.44 per share for the quarter, assuming 137.5 million diluted weighted-average shares outstanding and a 30.5% tax rate.

For full year FY16, Lululemon expects net revenue to be in the range of $2.32 billion to $2.35 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 $2.11 per share to $2.19 per share for the full year, or $2.07 per share to $2.15 per share normalized for the tax and related interest adjustments made during H1 FY16, and assuming 137.5 million diluted weighted-average shares outstanding and a 28.7% tax rate, or 30.5% excluding the above tax and related interest adjustments.

Stock Performance

l4Lululemon’s stock ended the day at $65.81, slipping 0.26%, at the close on Monday, September 20th, 2016, having vacillated between an intraday high of $66.55 and a low of $65.42 during the session. The stock’s trading volume was at 1,260,815 for the day. The Company’s market cap was at $9.03 billion as of Monday’s close.

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