Scandal can shake a company to its core, and yoga-apparel retailer lululemon athletica (NASDAQ:LULU) has had to deal with years of bad publicity resulting from its yoga-pant recall and the subsequent concerns about the quality of its merchandise. Coming into Tuesday morning's fiscal first-quarter financial report, many shareholders were looking for a solid turnaround in Lululemon's results, with the hope that earnings would stabilize and start moving higher along with revenue. Lululemon's results showed continued progress toward that goal, but the company has more work to do before it can declare final victory. Let's take a closer look at Lululemon's latest results and what's coming next for the retailer.
Lululemon strikes a pose
Lululemon's results for the quarter were better than many investors had anticipated. Revenue climbed 10% to $423.5 million, beating the expectation for $419 million in sales, with total comparable sales rising 6% on a constant-currency basis. Lululemon's net income jumped 150%, mostly because of a substantial tax-related charge in last year's fiscal first quarter, but even flat earnings of $0.34 per share were a penny better than investors' consensus figure.
Yet looking more closely at the report, there were some disturbing elements to Lululemon's performance. Growth in comparable sales came entirely from the rise of direct-to-consumer initiatives such as Lululemon's website, which picked up 31% on a constant-dollar basis from the year-ago quarter. By contrast, among its fixed locations, Lululemon's comparable-store sales actually fell 1% even after adjusting for currency impacts, reversing last quarter's gain in comps and raising questions about the sustainability of the company's turnaround efforts.
Margins also continued to raise questions at Lululemon. Both gross margin and operating margin were down more than 2 percentage points again in the quarter, and even a slight reduction in operating expenses could not reverse most of the downward trend.
Yet for the most part, Lululemon seemed satisfied with the latest results. In the earnings press release, CEO Laurent Potdevin characterized the period as "another improving quarter," citing "positive trends in traffic, conversion, and brand engagement, along with a continued acceleration of our e-commerce business."
How Lululemon is emphasizing sales over profits
Lululemon understands that it's important to keep making long-term strategic progress in rebounding from its woes of the past couple years, even if it comes at the expense of some short-term profits. As Potdevin put it, "To support our long-term goals, we are intentionally striking a strategic balance between strong growth and investments within innovation and infrastructure."
Lululemon's guidance for the current quarter and the rest of the fiscal year expresses that strategic balance. Lululemon now believes that sales for both periods will be better than originally expected, with a revenue range of $440 million to $445 million for the fiscal second quarter exceeding current predictions from investors. Similarly, full-year revenue of $2 billion to $2.05 billion is $30 million higher than Lululemon's guidance from last quarter.
On the earnings front, though, Lululemon's predictions won't be as satisfying to shareholders. For the second quarter, forecast earnings of $0.31 to $0.33 per share are below the $0.34 consensus. Although the company boosted its earnings range for the full year by a penny to $1.86 to $1.91 per share, Lululemon is still falling short of the 2% growth investors want, with the midpoint of that range representing roughly flat bottom-line performance.
Investors in Lululemon initially breathed a sigh of relief following the report, with the stock's roughly 3% gain in the first couple hours of pre-market trading following the announcement, which goes a long way toward reversing shares' 3.5% drop yesterday. In order to complete a true turnaround, though, Lululemon must boost not only its sales but also its ability to profit from those sales. Even as many short-term traders celebrate modest outperformance, the real question for long-term shareholders is whether the yoga-apparel specialist will ever recapture all of the lost glory from its early days.