Coming into Thursday morning's fiscal fourth-quarter financial report, Lululemon Athletica (NASDAQ:LULU) had a lot of investors looking for a solid turnaround in the yoga-apparel retailer's results. After years of struggling against quality-control issues and other controversies, shareholders had started to get more comfortable with the idea that CEO Laurent Potdevin and his management team might finally be on the right track toward restoring the company's image as a high-growth leader. Yet while Luluemon's results confirmed that trend, its guidance for the coming year raised doubts about whether the retailer's renaissance will bring back the pace of growth that investors want to see. Let's look at how Lululemon did and what it sees for the year ahead.
Posing for holiday cheer
Lululemon's holiday-quarter results gave optimistic investors much of what they wanted to see. Sales of $602.5 million were up 15% from year-ago levels, and total comparable sales were up 8% on a currency-adjusted basis. Earnings of $0.78 per share were up 4% from last year's fiscal fourth quarter and topped expectations by a nickel per share.
The details of the report revealed some of the nuances of Lululemon's turnaround. The company's e-commerce and other direct-to-consumer initiatives continue to pay off for the retailer, as revenue from those sources jumped 20% on a currency-neutral basis. Yet even the once-flagging store network made good on its potential, posting a 5% increase in comps after taking the U.S. dollar's strength into account.
Still, Lululemon faced plenty of challenges that it wasn't entirely able to overcome. Margins generally suffered, with gross margin falling two percentage points and operating margins dropping 3.5 percentage points to 26.1%. Repurchases of about 400,000 shares helped reduce share counts, boosting earnings-per-share growth despite just a 1.1% rise in net income.
Moreover, Lululemon's full-year results showed just how sluggish the earlier part of the fiscal year was. As a whole, comparable-store sales for Lululemon's store network fell 1%, with similar-sized declines in margins for the company. Net income slumped almost 15% from year-ago levels, and even after taking out one-time charges for tax expenses on repatriated earnings, Lululemon's full-year earnings per share dropped despite its buyback of 3.7 million shares.
Nevertheless, company executives were pleased with the news. Potdevin argued that "solid performance in the fourth quarter builds on the momentum that began in the third quarter and reflects improved traffic and a strong guest response." Looking ahead, Potdevin expects Lululemon to "accelerate our investments in innovation to drive sustainable global growth as we continue to lead the market we created."
Why Lululemon could slump in 2015
Unfortunately, Lululemon Athletica's guidance didn't meet the high hopes of investors following the stock. For the first quarter, Lululemon expects sales of between $413 million and $418 million, producing low-single-digit percentage total comps and falling well short of the $442 million consensus projection. That would likely indicate flat or negative performance from its retail storefronts, and earnings per share guidance of $0.31 to $0.33 is also markedly below the $0.39 per share estimate among analysts.
Similar sluggishness could persist all year. For fiscal 2015, Lululemon expects sales of $1.97 billion to $2.02 billion and earnings of $1.85 to $1.90 per share, with only slightly higher comps in the mid-single-digit range. Although the direction of overall sales remains positive, the fact that Lululemon doesn't expect earnings to return even to fiscal 2013 levels this year means that investors will have to be patient in the pace of the yoga-retailer's recovery.
Investors weren't initially pleased with the report, as shares fell another 3% in early after-hours trading following the announcement. Yet by the end of the day, the stock actually closed up 5%, as attention focused on its longer-term prospects.
Still, with so many shareholders having waited patiently for Lululemon to get its act together following its yoga-pant debacle, it's frustrating to watch the retailer make so little progress in returning to its former glory. Given enough time, Lululemon might well be able to put together the turnaround that investors expect. With competitors seeking to exploit the market that Lululemon arguably created, though, the yoga specialist's shareholders have to wonder whether they'll ever see the company return to its full potential.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. The Motley Fool owns shares of Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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