Workout wear specialist Lululemon Athletica Inc. regained some favor in the investment community Thursday with second-quarter results that beat modest expectations and a forecast of positive comparable sales in the third quarter.
Shares shot up $5.34, or 13.9 percent, to close at $43.73 in Nasdaq trading, their highest close since June 11, the day before the firm reported disappointing first-quarter earnings. But the stock is still 43.8 percent below its 52-week high of $77.75 reached Oct. 4.
Investors were encouraged by “beats” on both the top and bottom line, by projections of a comp increase in the new quarter, by inventory levels that rose less than sales and by product adjustments made under the stewardship of chief product officer Tara Poseley.
But concerns remained about intensified competition in the yogawear category from players such as Gap Inc.’s Athleta business and possible margin erosion as the company becomes more dependent on transitional fashion products and less reliant on core items. There is also uncertainty about the company’s ability to get its 270 stores, principally in North America, back into positive comp territory on a sustained basis.
As a result, most analysts tracking the firm maintained “neutral” or “market perform” ratings for the stock.
“We do not believe this quarter is anything that gives us confidence to say Lulu is on a straight path to recovery,” commented Wells Fargo Securities analyst Paul Lejuez. “We continue to expect many more bumps along the road as competition intensifies in the category and Lulu strives to find the right balance between basics and fashion.”
The bumps have been many for the once high-flying stock in recent seasons, from its recall of overly sheer Luon yoga pants in early 2013 to its battle with founder and former chief executive officer Chip Wilson, recently settled with the sale of about half of his shares to Advent International.
Those struggles were at least temporarily in the rear-view mirror Thursday as the company reported net income of $48.7 million, or 33 cents a diluted share, for the three months ended Aug. 3. While 13.7 percent below the $56.5 million, or 39 cents, reported in the comparable 2013 period, the earnings per share result was 4 cents better than analysts, on average, had expected.
Revenues, expected to hit $376.8 million, exceeded estimates as well, rising 13.4 percent to $390.7 million from $344.5 million a year ago. Comparable sales were flat on a constant-dollar basis, with same-store sales down 5 percent and direct-to-consumer revenues up 30 percent to $63.5 million. The flat comp result exceeded the 2.9 percent decline expected by Retail Metrics.
Gross margin receded to 50.5 percent from 54 percent while operating margin pulled back 555 basis points to 17.4 percent of sales, the largest such drop since the Luon recall cut into first-quarter results in 2013.
John Currie, chief financial officer, gave an upbeat assessment of recent trends in the company’s stores on a conference call with analysts.
“For the past couple of quarters, traffic has been down and that’s what’s negatively impacted our comp,” he said. “But in Q2, actually traffic was slightly positive, so that’s encouraging. But the comp is adversely impacted by lower conversion and average basket, which is consistent with the fact that our product assortment wasn’t ideal, but again encouraging in terms of trend.”
Lululemon expects better in the current third quarter, with comps forecast to increase in the low-single digits on a constant dollar basis. “This guidance still implies a negative store-only comp in the low-single-digit range for Q3, which could still cause [de-leveraging] on fixed expenses,” commented Janney Capital Markets analyst Adrienne Tennant, who maintained her “neutral” rating on the stock. While impressed by the firm’s inventory discipline — inventories were up 7.6 percent to $176.5 million versus the year-ago level — she expressed concern about competition not only from Athleta but also from Under Armour Inc., which is looking to expand its penetration in women’s products.
For the third quarter, Lululemon projected net revenues between $420 million and $425 million and EPS of between 36 and 38 cents. On average, analysts estimated revenues of $421.9 million and EPS of 38 cents in the current quarter.
First-half net income dropped 35.2 percent to $67.7 million, or 46 cents, while revenues advanced 12.3 percent to $775.3 million.