Shares of Lululemon Athletica Inc. dropped 13.1 percent Wednesday after the yoga apparel firm posted a decline in third-quarter profits and lowered full-year guidance.
For the three months ended Nov. 1, net income slid 12.1 percent to $53.2 million, or 38 cents a diluted share, compared with $60.5 million, or 42 cents, a year ago. Excluding certain tax and related interest adjustments, diluted EPS was 35 cents for the quarter. Net revenues rose 14.4 percent to $479.7 million from $419.4 million. The company said total comparable-store sales and direct to consumer increased 9 percent for the quarter on a constant dollar basis. By segment, comps rose 6 percent and direct to consumer revenue increased 21 percent for the period.
The company said income from operations fell by 16 percent to $68.2 million, or 14.2 percent as a percentage of net revenue, compared with 19.4 percent of net revenue in the year-ago quarter.
Wall Street’s analyst consensus was expecting 37 cents on revenue of $482.1 million. Shares of Lululemon closed at $45.31.
Laurent Potdevin, Lululemon’s chief executive officer, said, “We’ve implemented critical organizational changes this quarter and now have in place a complete, world-class management team that is aligned with our strategic global priorities focused on design and dedicated to creating long-term value.”
In October, the company named Lee Holman executive vice president and creative director, a new position, where he will oversee both men’s and women’s product design and report directly to Potdevin. Holman had been senior vice president of women’s. In addition, Tom Waller was promoted to senior vice president of Whitespace, the team of scientists and engineers at Lululemon who work to drive long-term innovation. Waller also reports directly to Potdevin.
During the conference call to Wall Street analysts, Potdevin said, “In line with macroeconomic trends, the start of Q4 has been mixed. We saw lower traffic in the final weeks of Q3 and into the first couple of weeks of Q4 , with steady improvement since Thanksgiving. Given the current environment, we are taking a conservative stance with revenue in Q4, while taking the necessary actions to manage inventory and control expenses.”
The ceo also said that the company is seeing “sequential improvement in product margins.”
Potdevin said the women’s business continued to be strong, with an acceleration in pants and bras. Both categories delivered double-digit comps for the quarter. In men’s, the business continued to outpace Lululemon’s overall growth, comping 24 percent for the quarter, he said, adding that the business was anchored by its sweats category.
The company’s chief financial officer, Stuart Haselden, said gross profit fell to $224.8 million, or 46.9 percent of net revenue, compared with $211.1 million, or 50.3 percent of net revenue a year ago. He noted that some of the factors contributing to the decline in gross margin were due to higher markdowns, foreign exchange impact of a weaker Canadian and Australian dollar and higher lease costs.
The company said it expects diluted EPS in the range of $1.81 to $1.84 for the full year, on a revenue range of $2.03 billion to $2.04 billion. The company’s prior forecast was an EPS range of $1.87 to $1.92 on revenue range between $2.03 billion and $2.06 billion.
Wells Fargo’s analyst Ike Boruchow has shares of Lululemon at “market perform,” the equivalent of a “hold” on the stock.
Boruchow said the company’s third-quarter results “provided more questions than answers.” He noted that quarter-to-date sales trends have slowed, inventories are heavy and should remain elevated through year end, and gross markdowns should remain down year-over-year into the first quarter of next year. “Quite frankly, despite the fact that Lululemon is a strong brand operating in a growing category, we find it very difficult to get comfortable with the margin structure of the business,” he said, explaining the reason for the market perform rating.