Early in its history, lululemon athletica (LULU 1.70%) was ahead of its time, helping to create the trend toward healthier living and promoting its brand as a lifestyle choice among a loyal customer base. Through thick and thin, Lululemon has sought to build on that strong foundation, but the company has had to deal with controversy and strife in order to find ultimate success.
Coming into Thursday's fiscal first-quarter financial report, Lululemon investors wanted to see continuing evidence that the yoga apparel retailer would be able to sustain sales growth even if earnings were weak. Lululemon's results were actually stronger than most had expected, and some big structural changes could point toward even better performance in the near future. Let's look more closely at Lululemon to see how it did and whether it can keep gaining momentum.
How Lululemon surprised shareholders
Lululemon's fiscal first-quarter results gave most investors what they wanted to see. Revenue was higher by 5% to $520.3 million, which was a bit faster than the consensus forecast among those following the stock. Adjusted net income climbed 8% to $44.3 million, and the resulting $0.32 per share in adjusted earnings was higher from year-ago levels and $0.04 per share better than most investors had expected.
Looking more closely at the report, Lululemon bounced back in many ways from last quarter's difficulties. Adjusted gross margin climbed by more than two percentage points, climbing back above the 50% mark. GAAP operating margin fell, but after making adjustments for extraordinary items, adjusted figures climbed half a percentage point, to 12.1%. Despite higher taxes, Lululemon was able to overcome their impact to see improved adjusted net income.
However, some of Lululemon's metrics remained sluggish. Total comparable sales fell 1%, and comparable-store sales were off by 2% when you took out sales from the direct-to-consumer channel. Flat revenue from direct-to-consumer didn't help Lululemon's overall prospects, and a strong U.S. dollar imposed a small amount of downward pressure on the yoga apparel specialist's revenue.
In addition, growth in Lululemon's store count slowed. Just five new stores opened during the quarter, bringing the total count to 411. Nevertheless, total square footage climbed above the 1.2 million mark, and the total number of locations was up 10% in just the past 12 months.
CEO Laurent Potdevin expressed his excitement at positive trends that he saw come into play toward the end of the quarter. "From our cadence of product innovation to our enhanced digital experience," Potdevin said, "we have never felt more deeply connected to our guest or better positioned to expand our collective." The CEO believes that the second quarter has also started out well, pointing to solid results for the remainder of the year.
Can Lululemon Athletica keep stretching?
Yet the move with the most impact going forward has to be Lululemon's decision to move its ivviva girls' clothing concept to a mostly online format. Out of its 55 branded stores, 40 ivviva locations will close, and about half of the remainder will switch to full Lululemon locations. Only a select number of stores in key communities will remain open. The restructuring will have some costs, but Potdevin noted that he believes the plans are "the best means to optimize this part of the business."
Lululemon also took the opportunity to revise its guidance for the year. Now, the retailer believes it will have revenue of $2.53 billion to $2.58 billion, which is down about $20 million from its previous quarter's guidance. Yet earnings projections rose about $0.02 per share to a new range of $2.28 to $2.38 per share, excluding the costs associated with the ivviva restructuring. For the fiscal second quarter, sales of $565 million to $570 million and adjusted earnings of $0.33 to $0.35 per share are mixed compared to investor expectations for weaker sales but slightly stronger bottom-line performance.
Lululemon investors focused on the positives in the report, and the stock responded with a 14% jump in after-hours trading following the announcement. Investors appear convinced that the yoga specialist can take full advantage of favorable conditions in the near future, and that could help send the stock back toward much higher levels from previous years.