athletica (LULU 121.3002, +16.2502, +15.47%), an athletic apparel company, is trading sharply higher today
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 apparel is marketed under the lululemon athletica and ivivva
athletica brand names.
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. 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 400 lululemon stores, about 70% of which are in the US.
Its primary target customer is a sophisticated and educated person with an active, healthy lifestyle who is balancing work, life, and health. LULU believes it has been able to effectively address the customer’s unique fitness 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. Its ivivva brand focuses on activewear for girls.
As part of the restructuring of its ivivva operations, the company closed 48 of its 55 ivivva stores in August 2017 with some being converted into lululemon stores. The seven remaining ivivva branded stores are in operation today and are not expected to close. ivivva is now primarily an e-commerce focused business.
Turning to the earnings results, AprQ non-GAAP EPS jumped 72% year/year to $0.55, which was better than prior guidance of $0.44-0.46. Revenue rose 24.9% year/year to $649.7 mln, which was above prior guidance of $612-617 mln. Adjusted operating margin was 16.1%, an increase of 400 basis points year/year. Same store comps are always important for retailers. On that front, total comps jumped +20% (+8% for in-store comps and +62% for direct-to-consumer, online comps).
As for guidance for Q2 (Jul), LULU expects EPS of $0.46-0.48, which is above market expectations, and it expects revenue of $660-665 mln, which also is above market expectations. For the full year, LULU sees EPS of $3.10-3.18 and revenue of $3.040-3.075 bln. On the call, LULU said it's seeing momentum across the core areas of its business in channel, product, and guest engagement. LULU remains firmly on track to achieve its ambition of $4 bln in revenue in 2020.
In terms of product innovation, LULU is excited about its product pipeline. Some examples include its recently developed “Out of Mind” short liner in the men's line which is now offered in three styles and is performing extremely well into Q2 (Jul). LULU also launched its City Sweat franchise for men, which includes a collection of hoodies and joggers made from its technical French Terry fabric. Guests responded well to this collection in Q1 and this paves the way for further opportunities in its “Office Travel Commute” category for the men's line.
Building on the success of Enlite, LULU sees a compelling opportunity to develop new styles with varying levels of support in the bra category. In Q1, LULU launched the Speed Up Bra featuring a new molded technology and the company has additional styles ready to introduce later this year. LULU is also excited about its Embrace movement collection, due to launch in the fall. This will be a technically driven line of bottoms for women and men offering zoned compression, fully leveraging LULU's ongoing work as part of the “science of feel”.
In business outside of North America, LULU is still in the early innings of one of its most important growth strategies. Asia continues to lead the way and in Q1 LULU saw combined comps over +50% with particularly strong results in China. LULU successfully opened its third and fourth stores in Seoul, Korea with the most recent opening in the iconic Lotte World Mall. LULU expects to open 15 to 20 stores in Asia in 2018 and plans to launch a local e-commerce site in Korea later this year. In Europe, LULU saw strong growth as well with double digit comps exceeding internal plans. In addition to the recent store openings in Berlin and Frankfurt, LULU added to its presence in the UK with a new store in Guildford outside of London.
The +62% e-commerce comp was driven by strong increases in traffic and conversion. While comparisons do get more difficult in each subsequent quarter in 2018, LULU was pleased to see strong momentum extending into Q2. Looking at traffic, its digital teams are driving high quality web and mobile traffic leveraging its email file growth, improving its targeting capabilities and seeing more return guests. Email file nearly doubled in the quarter. Direct marketing related traffic to its site increased by more than 60% with an increase of over 50% in transactions made by existing guests.
It's worth noting that, in early February, lululemon's CEO Laurent Potdevin resigned, effective as of that day. According to the call, LULU has met with a number of candidates who are both qualified and interested. The whole board is together next week and will be discussing the candidates then.
In sum, the jump in the stock price today to a new all-time high is a welcome sight for investors. The stock had been stuck in a sideways pattern from December to late March, in the $76-83 range. However, very strong back-to-back quarters in Q4 and now in Q1 has led to a breakout in the stock to the $112 area. On a final note, LULU has a great balance sheet with $967 mln in cash/inv, or $7.11/share, with no LT debt.
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