Lululemon Athletica Inc.’s margins are feeling the pressure of the active wear firm’s empire building — and investors aren’t happy about it.
Shares of Lululemon dropped 12.6 percent in early trading today after the company said its margins had contracted significantly in the second quarter, with gross profit weighing in at 46.8 percent of revenues compared with 50.5 percent a year earlier. The firm also issued a profit outlook that left investors wanting more.
Chief executive officer Laurent Potdevin addressed the margin issue head-on when he spoke with analysts on a conference call.
“It’s really, really important for everybody to understand that the short-term growth margin pressure that we are experiencing is not the result of higher markdowns or quality issues,” Potdevin said. “We’re building a very scalable, complex platform at a time where we’re growing internationally, and we’ve added resources to the team, and we have validated not only that we will see the margin expansion that we committed to, but see it in 2016 and beyond.”
Investors seem to need some more convincing and midday the stock was down $8.06 to $55.99.
Chief financial officer and recent J. Crew transplant Stuart Haselden said the company’s 370 basis point decline in gross margins broke out as such:
* 110 basis points in product margin decline, partially attributed to the West Coast port slow down.
* 30 basis points for higher markdowns due in part to an online warehouse sale.
* 50 basis points to cover higher air freight costs.
*70 basis points due to foreign exchange.
* 110 basis points related to occupancy and depreciation to cover the company’s international expansion, renewals of existing stores and higher lease costs associated with an increase in major renovations and relocations.
Lululemon has been busy building its men’s business and branching out abroad.
Potdevin said that the company’s men’s business was up 31 percent on a combined comparable basis, driven by the sweats category. And he described the international business as “a key growth driver.”
The brand is increasing its presence in major European and Asian cities and later this month will open its first door in Dubai, marking the company’s retail entrance into the Middle East.
In the second quarter, Lululemon’s net income fell 2.2 percent to $47.7 million from $48.7 million. Earnings per diluted share moved in the opposite direction, rising to 34 cents from 33 cents, driven by the repurchase of 1 million shares during the quarter.
Revenues for the quarter ended Aug. 3 rose 15.9 percent to $453 million from $390.7 million as comparable-store sales increased 11 percent on a constant-dollar basis. Sales picked up some from the first quarter, when revenues rose 11 percent.
For the third quarter, the firm guided toward earnings per diluted share of 35 cents to 37 cents — well below the 43 cents analysts had penciled in.