lululemon athletica (LULU), a yoga-inspired athletic apparel company, is trading sharply higher today (+15%) after reporting Q1 (Apr) earnings and providing guidance. In case you're not familiar, lululemon athletica is a designer and retailer of technical athletic apparel. Its yoga-inspired apparel is marketed under the lululemon athletica and ivivva athletica brand names.
Its primary target customer is a sophisticated and educated woman with an active, healthy lifestyle who is balancing work, life, and health. As women have continued to embrace a variety of fitness and athletic activities, including yoga, LULU believes it has been able to effectively address their unique fit and performance needs by incorporating style along with comfort and functionality. While its focus is women, LULU also designs products for men and female youth who appreciate the technical rigor and premium quality of its products. Its ivivva brand focuses on activewear brand for girls.
LULU sells a full line of apparel and accessories including fitness pants, shorts, tops and jackets designed for athletic pursuits such as yoga, running, general fitness and dance-inspired apparel for female youth. LULU is based in Canada but has significant operations in the US as well as a smaller presence in Australia, the UK, New Zealand, China, Hong Kong, Singapore, South Korea, Germany, Puerto Rico and Switzerland. Overall, LULU operates approximately 350 lululemon stores, about 70% of which are in the US. In addition, LULU operates 55 ivivva stores, but most of these will be closing as the ivivva brand is switching to online only (see below).
Turning to the earnings results, AprQ non-GAAP EPS rose 7% YoY to $0.32, which was better than market expectations. Revenue rose 5.0% year/year to $520.3 mln, which was above prior guidance of $510-515 mln. Adjusted operating margin was 12.1%, an increase of 50 basis points. Same store comps are always important for retailers. On that front, total comps decreased -1%. Breaking that down a bit, comparable store sales (not including online) decreased -2% while online revenue was flat.
In terms of guidance for Q2 (Jul), LULU expects non-GAAP EPS of $0.33-0.35, which is below market expectations, and it expects revenue of $565-570 mln, which is above market expectations. For FY18, LULU sees non-GAAP EPS of $2.28-2.38 and revenue of $2.53-2.58 bln.
In addition to earnings, the other big news was LULU announcing today that it plans to operate ivivva, its activewear brand for girls, as primarily an e-commerce focused business, with a select number of stores. It plans to close approximately 40 of its 55 ivivva branded stores and to convert half of the remaining stores to lululemon branded stores. The company will also close all of its ivivva branded showrooms and other temporary locations, and will streamline its corporate infrastructure. The closures and restructuring should be mostly done by October 31.
In sum, the jump in the stock price today is a welcome sight for investors after the stock fell sharply in late March on a roughly in-line JanQ but horrible guidance for AprQ. It turns out that AprQ actually came in better than expected and the JulQ guidance was not great but not horrible. The stock has been weak lately so it's likely there was a lot of pessimism going into this report. And while the numbers were decent but not great overall, the low expectations probably explains why the stock is up so much today. Also, investors are probably happy to see the ivivva brand going mostly online and away from brick-and-mortar stores.