The athleisure company reported worse-than-expected results, sending shares down. That might not be such a bad thing.
By guest author Jinjoo Lee from Wall Street Journal
High expectations on top of an already-high valuation meant Lululemon LULU -4.68% had a low margin for error. Its last quarter results appropriately brought expectations down a notch
Lululemon posted a sales decline of 17% from a year earlier in the quarter ended May 3, below analyst estimates. Its ever-rising share price suffered a reality check, declining almost 8% in after-hours trading.
The Vancouver, Canada-headquartered apparel company is no doubt one of the stronger performers in the industry, benefiting from the athleisure trend that was already under way before the pandemic, then getting a boost on work-from-home demand for comfortable clothes. Under Armour and Adidas reported greater declines in sales—23% and 19%, respectively—even though their quarter ended late March and didn’t encompass the full impact of April store closures.
Lululemon’s e-commerce business delivered strong gains, pulling in 70% higher sales in the quarter. Moreover, that online sales growth accelerated in April, which saw a 125% year-over-year gain in revenue, and the company expects to see that same level of growth in the present quarter.
Stretching Lululemon’s price-to-trailing-12-month-salesratioSource: FactSetNote: FY 2019 ended on Feb. 2, 2020.
That said, the company was quick to temper expectations in a conference call late Thursday, noting that total revenue in the quarter ending August could decline by a high single-digits percentage. It also pointed out that the decline in earnings per share in the quarter will likely be worse than what is implied by FactSet consensus estimates. Even though it expects to reopen almost all of its stores by the end of June, productivity under social distancing requirements could be limited because most of its locations are small format.
In contrast to other apparel companies, which prioritized limiting inventory, Lululemon didn’t seem concerned about its inventory increase of 41% compared with the past year, saying that 40% of it comprises core products that have longer shelf life and will mostly be sold—at full prices—once stores open up. In fact, the company said inventory growth could be higher in the current quarter.
Lululemon still has plenty of room for growth, including in menswear and overseas markets. But its valuation was getting uncomfortably high: Before Thursday’s close, its shares were trading at 10.4 times the last 12 months of sales ending May 3, double the five-year average. A little pressure off the valve might be not such a bad thing for Lululemon.
Here is the official press release from Lululemon
Lululemon -Revenue declined 17 % to USD 652 million -Diluted EPS of USD 0.22 for the first quarter
lululemon athletica inc. (NASDAQ:LULU) announced financial results for the first quarter of fiscal 2020.
As a result of the COVID-19 pandemic, all of the Company’s stores in North America, Europe, and certain countries in Asia Pacific were closed for a significant portion of the quarter. Subsequent to May 3, 2020, the Company began reopening its retail locations in these markets in line with the guidance from local authorities. As of June 10, 2020, 295 of its company-operated stores were open.
For the first quarter ended May 3, 2020:
- Net revenue was USD 652.0 million, a decrease of 17 % compared to the first quarter of fiscal 2019. On a constant dollar basis, net revenue decreased 16 %.
- Direct to consumer net revenue increased 68 %, or increased 70 % on a constant dollar basis.
- Direct to consumer net revenue represented 54.0 % of total net revenue compared to 26.8 % for the first quarter of fiscal 2019.
- Gross profit was USD 334.4 million, a decrease of 21 % compared to the first quarter of fiscal 2019.
- Gross margin was 51.3 %, a decrease of 260 basis points compared to the first quarter of fiscal 2019.
- Income from operations was USD 32.8 million, a decrease of 75 % compared to the first quarter of fiscal 2019.
- Operating margin was 5.0 %, a decrease of 1,150 basis points compared to the first quarter of fiscal 2019.
- Income tax expense was USD 5.3 million compared to USD 34.6 million in the first quarter of fiscal 2019 and the effective tax rate was 15.6 % compared to 26.4 % for the first quarter of fiscal 2019.
- Diluted earnings per share were USD 0.22 compared to USD 0.74 in the first quarter of fiscal 2019.
- The Company repurchased 0.4 million shares of its own common stock at an average cost of USD 172.68 per share.
The Company ended the first quarter of fiscal 2020 with USD 823.0 million in cash and cash equivalents and the capacity under its committed revolving credit facility was USD 398.2 million. The Company had USD 576.2 million in cash and cash equivalents at the end of the first quarter of fiscal 2019. Inventories at the end of the first quarter of fiscal 2020 increased 41% to $625.8 million compared to USD 443.0 million at the end of the first quarter of fiscal 2019. The Company ended the quarter with 489 stores.
Calvin McDonald, Chief Executive Officer commented: “I’m proud of how lululemon has navigated these unexpected and unprecedented times. We are learning more every day about our guests — how they enjoy interacting with us online and what makes them comfortable as stores reopen.” McDonald continued: “Our strong digital business demonstrates the strength of our guest connection and the long-term opportunity to create further Omni experiences going forward.”
The outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization in March 2020. The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers. Government authorities in certain markets in which the Company operates have also issued orders that require the closure of non-essential businesses and people to remain at home.
The Company has taken actions to close retail locations and to reduce operating hours, and it continues to monitor the situation and work closely with local authorities to prioritize the safety of its people and guests. In February 2020, the Company temporarily closed all of it retail locations in Mainland China. All of these locations have since reopened. In March 2020, it temporarily closed all of its retail locations in North America, Europe, and certain countries in Asia Pacific. Subsequent to May 3, 2020, the Company began reopening its retail locations in these markets in line with the guidance from local authorities. As of June 10, 2020, 295 of its company-operated stores were open.
The Company’s retail locations and distribution centers are operating with precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and maximum occupancy levels.
The Company remains confident in the long-term growth opportunities and its Power of Three growth plan and believes that it has sufficient cash and cash equivalents, and available capacity under its revolving credit facilities, to meet its liquidity needs. As of May 3, 2020, the Company had cash and cash equivalents of $823.0 million and the capacity under its committed revolving credit facility was $398.2 million.
Fiscal 2020 Outlook
Due to the impact that COVID-19 is having across the globe, and the rapid and continuous developments, the Company is not providing detailed financial guidance for fiscal 2020 at this time.
lululemon athletica inc. (NASDAQ:LULU) is a healthy lifestyle inspired athletic apparel company for yoga, running, training, and most other sweaty pursuits, creating transformational products and experiences which enable people to live a life they love. Setting the bar in technical fabrics and functional designs, lululemon works with yogis and athletes in local communities for continuous research and product feedback. For more information, visit www.lululemon.com.
Comparable Store Sales and Total Comparable Sales
The Company typically believes that investors would find comparable store sales and total comparable sales useful in assessing the performance of its business. As the temporary store closures from COVID-19 have resulted in a significant number of stores being removed from its comparable store base, the Company believes total comparable sales and comparable store sales are not currently representative of the underlying trends of its business. The Company does not believe these metrics are currently useful to investors in understanding performance, therefore it has not included these metrics in this press release.
Non-GAAP Financial Measures
Constant dollar changes in net revenue and direct to consumer net revenue are non-GAAP financial measures.
A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign exchange rates for the same period of the prior year. The Company provides constant dollar changes in net revenue and direct to consumer net revenue because it uses these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates. The Company believes that disclosing these measures on a constant dollar basis is useful to investors because it enables them to better understand the level of growth of its business.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the section captioned “Reconciliation of Non-GAAP Financial Measures” included in the accompanying financial tables, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.