Why the Market Shrugged Off Lululemon's Revenue Guidance Reduction

Shares of the yoga apparel specialist jumped despite its reduced sales expectations for the year. Here's why.

Steve Symington
Steve Symington
Jun 8, 2017 at 7:07PM
Consumer Goods

When lululemon athletica (NASDAQ:LULU) announced fiscal first-quarter results last week, its performance looked solid at first glance. Revenue climbed a modest 5% year over year to $520.3 million, and adjusted earnings rose 8.3%, to $44.3 million, or $0.32 per share. Both figures were well above lululemon's guidance provided three months earlier, which called for quarterly revenue of $510 million to $515 million and earnings of $0.25 to $0.27 per share. And Wall Street, for its part, was looking for both the top and bottom lines to arrive near the high ends of that guidance.

But lululemon's results were far from perfect. Comparable-store sales at existing bricks-and-mortar stores declined 1% year over year, while e-commerce revenue remained flat. So revenue growth was driven entirely by 38 net new locations opened over the past year. In addition -- and despite its relative outperformance to start the year -- lululemon simultaneously reduced its full-year guidance to call for revenue in the range of $2.53 billion to $2.58 billion, down from $2.55 billion to $2.60 billion previously.

Lululemon yoga class


Perspective is in order

So why, then, did shares of lululemon pop more than 12% on the news? Look no further than the company's decision to restructure its kidcentric ivivva brand.

To be sure, lululemon will operate ivivva as primarily an online business going forward, maintaining only a small number of bricks-and-mortar ivivva stores in "key communities" across the country. It will close 40 of its 55 ivivva-branded stores, then convert roughly half of the remaining locations into lululemon-branded stores. Lululemon will also close all 16 of its ivivva showroom locations as well as well as other temporary locations, and will streamline the brand's supporting corporate infrastructure. Most of these changes will be complete by the end of lululemon's fiscal third quarter, which easily explains the company's slight revenue guidance reduction for the year. 

Relatedly, lululemon also increased its expectations for full-year earnings per share -- as adjusted to exclude pre-tax expenses of $50 million to $60 million related to the restructuring, of course -- to be in the range of $2.28 to $2.38, up from previous guidance for full-year adjusted EPS of $2.26 to $2.36. 

Moving toward the future of retail

In a prepared statement, CEO Laurent Potdevin elaborated on both ivivva and more recent progress in lululemon's core business, stating:

I'm excited to see the positive trends that materialized late in Q1 continuing into Q2. Our current outlook for the remainder of 2017 is strong, and I'm energized by the growth strategies taking shape. I'm also confident in our plans to restructure ivivva and believe they are the best means to optimize this part of the business.

During the subsequent conference call, CFO Stuart Haselden noted that lululemon started the first quarter slowly, but saw an acceleration in sales through the end of April that has proved sustainable so far in the second quarter. In particular, e-commerce sales trends have improved significantly in recent weeks thanks to the company's efforts to bolster its online presence, with the online business delivering low double-digit percent comparable sales growth to date the second quarter. Therefore, lululemon is boosting investments to support e-commerce business growth, with its earliest "aggressive actions" including site optimization, visual merchandising, and improvements in both digital marketing and social media engagement. 

"We are confident that these are the correct investments to make now to build our business for the long term," insisted Haselden. 

That's fair enough, especially considering current retail headwinds that are still holding back so many businesses that rely primarily on bricks-and-mortar locations to drive sales. If lululemon is able to carry forward its recent strength into the coming quarters as competitors falter, it should be well positioned to continue delivering market-beating gains for investors in the coming years.

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