Lululemon Athletica Inc.’s first-quarter earnings had investors breathing a victorious breath.
Income from operations for the quarter fell by 15 percent to $57.6 million, or 33 cents a diluted share, down from $68 million, or 34 cents, a year ago. Adjusted earnings per share totaled 30 cents and just missed the FactSet estimate for earnings of 31 cents a share.
Investors chose to look past the penny miss and instead focused on the sales increase. Net revenue for the three months ended May 1 increased by 17 percent to $495.5 million from $423 million a year earlier. Thisbeat the FactSet estimate of $488 million. Total comparable sales increased by 6 percent, while comp-store sales increased 3 percent. As a result, the stock rose almost 5 percent to $71.48 after hitting a fresh 52-week high of $71.95 in earlier trading.
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“We are pleased with our first-quarter performance, delivering strong sales results and gross margin that exceeded expectations,” said chief executive officer Laurent Potdevin. “We finished the quarter with our inventory levels rebalanced and on track to achieve our goals for the year.” Inventory levels had dropped 3 percent per square foot.
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Gross profits increased by 16 percent to $239.1 million and as a percentage of net revenue was 48.3 percent versus last year’s 48.6 percent for the same time period.
“With inventory under control at quarter-end, the 2Q16 up mid single digits comp guide and a better than expected 2Q16 gross margin outlook, we remain long shares of LULU as its top line momentum and pent-up gross margin power primes the model for EPS (earnings per share) beats going forward,” said Brian Tunick, analyst at RBC Capital.
Tunick listed 4 reasons why comps could be robust for the second half of the year. He cited creative director’s Lee Holman’s impact on women’s tops, better pricing on tops due to a technology focus, innovations in bottoms and benefits of the website relaunch.
Other analysts were equally positive on the earnings. “What matters is brand demand remains strong, gross margin recovery is on track and inventories are now inline,” said Jefferies analyst Randal Konik. Guggenheim’s Howard Tubin said, “In terms of key metrics we were looking for in the quarter, we got everything we wanted and then some.”
Lululemon opened 11 stores during the quarter and closed one. On the conference call, Potdevin spoke about the international expansion as the company opened stores in Singapore, Zurich and Korea.
Lululemon also spoke about the upcoming Olympics and its products to be worn by the Canadian beach volleyball team. It’s the first such partnership and a step beyond the yoga and running gear that Lululemon is known for.
Last week, founder and minority shareholder Chip Wilson sent a letter to the board of directors complaining that the company had lost its way and was falling behind rivals. However, the quarter seems fairly solid and the company seems to be on the path to turning things around.
Looking ahead, Lululemon raised guidance for 2016 revenue from a range of $2.29 billion to $2.34 billion to $2.31 billion to $2.35 billion. The company guided adjusted earnings per share for the year to a range of $2.05 to $2.15. The Capital IQ estimate is for $2.14.