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Lesson No. 1 before embarking upon an intense yoga session: Limber up.
lululemon athetica (Nasdaq: LULU ) forgot to get in a good warm-up this morning before it released its first-quarter digits, so it's been cramping up all day, with losses as bad as 13% in a broadly up session.
Starting with the basics
Net sales jumped 53% to $285.7 million, with net income rising to $46.6 million, or $0.32 per share. Comparable-store sales put up a strong showing by increasing 25%, which is reason to cheer in itself since earlier there was some concern late last year on comps decelerating to "just" low to mid-teens.
Turns out that management was just being a bit cautious with its outlook, as it's now posted comps growth of 26% and 25% in the following two respective quarters. The company's comparable-store base is now up to 127 of the 180 total locations worldwide.
Gross margin ticked down to nearly 4% to 55%, primarily because of inflation in raw material costs. lululemon is the type of company that has enough brand loyalty and strength to be able to pass along these increased costs to consumers through higher prices, but it looks like it's still taking a hit here. At the same time, aggressive pricing to boost sales is a veritable strategy in its own right. Besides, 55% is right around lululemon's long-term gross margin goal, so this downtick isn't sounding any alarms.
This fancy new "Internet" thing is pretty cool
Online sales continue to show incredible growth as direct-to-consumer sales nearly tripled, rising 179% to $38.4 million. The Australian-specific site was launched less than a month ago, and lululemon plans on launching other country-specific flavors later this year, such as in the U.K. and Hong Kong.
This segment now comprises 13.5% of revenue, up from 7.4% a year ago. Growing online sales will also boost overall operating margins, as the online segment enjoys a juicier 44% operating margin compared with the 34% operating margin seen in the corporate-owned stores.
lulu continues to see higher traffic and conversion rates on its site, so it plans on continuing investing in building out the channel.
International growth is just beginning
The company opened its London showroom in April and is off to a solid start, and the second showroom in Hong Kong is slated for the third quarter. CEO Christine Day could hardly contain her excitement about the demand that lululemon is seeing in Asia, calling it "even more compelling than Europe." Day said the yoga market in Asia is "very strong and growing."
Australia and New Zealand are still in the early stages of expansion. CFO John Currie said that geography is about three years behind the U.S. in terms of brand recognition, and stores in the region are putting up healthy comps.
Culprit behind the crash?
If there's one thing not to blame for today's drop, it's the inventory. Those concerns have mostly died down over the past year as lululemon proved skeptics wrong, silencing their protests that inventory growth was outpacing sales growth.
It was almost as if Day was directing this comment for their benefit alone: "Our strategy to increase inventory levels led to strong revenue growth and earnings performance in the first quarter as our guests responded well to our spring styles and colors."
Inventory now sits at $107.7 million, up 67% from the $64.4 million a year ago.
Instead, the real culprit is lululemon's guidance that came in shy of the Street's best guesses (much like last quarter), overshadowing the healthy beat on the just-reported quarter. Second-quarter revenue should be between $273 million and $278 million, with earnings per share of $0.28 to $0.30. We'll see if lululemon is again being conservative with its comps guidance of low double digits. Analysts were asking for about $290 million in revenue next quarter with a profit of $0.33 per share.
Not quite cheap, but cheaper
lululemon now trades just over 50 times earnings after the drop, cheaper than apparel rival Under Armour (NYSE: UA ) at almost 53 times earnings. When you consider that lululemon's TTM earnings growth rate of 50% trounces Under Armour's 33%, it sure sounds cheaper to me, unlike lulu's $118 Nothin' to Hide Running Jacket.
"Cheaper" is, of course, a relative term. The company still remains far more expensive than other athletic apparel companies such as Nike (NYSE: NKE ) , or retailers such as Dick's (NYSE: DKS ) . These stocks will serve different masters playing the same healthier-lifestyle trend, though. lululemon and Under Armour will take shelter in growth portfolios, while Nike and Dick's may find love with an income or value investor. I think lulu's brand cache will keep it a grade above the competition, though, and I think its growth story has room to run.
I'm not alone in thinking this is a buying opportunity; Janney Montgomery Scott is keeping its "buy" rating and $89 price target, despite the potential comps slowdown.
Future growth catalysts include continued international expansion, growing online sales, and new product lines including lululemon's recently launched swimwear lineup. As a shareholder myself, I'm not worried.
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