lululemon athletica (LULU), a yoga-inspired athletic apparel company, is trading sharply higher today (+8%) after reporting Q2 (Jul) 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, JulQ non-GAAP EPS rose 3% YoY to $0.39, which was a good better than prior guidance of $0.33-0.35. Revenue rose 12.9% year/year to $581.1 mln, which was above prior guidance of $565-570 mln. Adjusted operating margin was 12.8%, an increase of 160 basis points YoY. Same store comps are always important for retailers. On that front, total comps jumped +7%.
In terms of guidance for Q3 (Oct), LULU expects non-GAAP EPS of $0.50-0.52, which is generally in-line with market expectations, and it expects revenue of $605-615 mln, which is above market expectations. For FY18, LULU sees non-GAAP EPS of $2.35-2.42, up from prior guidance of $2.28-2.38. Co sees FY18 revs $2.545-2.595 bln, up from $2.53-2.58 bln prior guidance.
Earlier this year, LULU announced that it plans to operate ivivva, its activewear brand for girls, as primarily an e-commerce focused business, with just 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. Since then, LULU has reported strong results in AprQ and JulQ. It's making investors more optimistic that LULU is gaining momentum heading into the holiday season in a few months. Also, investors are probably happy to see the ivivva brand going mostly online and away from brick-and-mortar stores.
The stock has started to recover but it is still well of its $80+ share price seen in August 2016. It seems investors are still nervous about LULU but they are heading in the right direction. On a final note, LULU has a great balance sheet with $721 mln in cash/inv, or $5.29 per share, with no LT debt.