Lululemon Beats on Solid Top Line - Analyst Blog

Lululemon Athletica Inc. (LULU) reported third-quarter 2010 earnings of 36 cents a share, up from the year-ago figure of 20 cents and handily beating the Zacks Consensus Estimate of 25 cents. Lululemon now expects fourth-quarter 2010 earnings per share between 46 cents and 48 cents based on diluted shares outstanding of 72.2 million and a tax rate of 40%.

The company's 29.0% increase in consolidated comparable-store sales (comps) and 46.0% increase in corporate-owned stores revenue along with a strong e-commerce business aided the 56.0% year-over-year increase in total revenue, which climbed to $175.8 million from $112.9 million reported in the year-ago quarter. Corporate-owned stores contributed $143.2 million to total revenue, surpassing $98.1 million reported in the year-ago quarter. E-commerce and phone sales added $14 million while franchises put in $18.6 million. Total revenue beat the Zacks Consensus Estimate of $159 million.

Gross profit, which came in at $96.8 million, rose 72% year over year, reflecting high, double-digit growth in the top-line, partially offset by an increase in selling, general and administrative expenses. Gross margin improved 520 basis points to 55.0%. Operating income for the quarter was $42.4 million compared with $20.9 million a year ago while operating margin expanded 560 basis points to 24.1%.

Financial Aspects

Cash and cash equivalents at the end of the quarter turned in at $224.8 million and stockholders' equity at $326.7 million. Capital expenditures were $10.4 million in the quarter attributable to new store build, existing store renovations, and IT capital expenditures.Cash from operating activities, year to date, came in at $87.9 million compared with $51.8 million in the year-ago period.

Store Update

In the reported quarter, Lululemon opened four corporate-owned stores and ended the quarter with 134 total stores comprising 130 corporate-owned stores and 4 franchises, including nine in Australia.

Fourth-Quarter Outlook

Management estimates that existing store upgrades and new store openings have the potential to generate net revenues of $210–$215 million for the fourth quarter of fiscal 2010. Comps are expected to be in the high teens in the said quarter.

Operating margins too are expected to expand by approximately 100 basis points over last year's fourth quarter attributable to an increase in gross margin driven by leverage on fixed costs such as occupancy and depreciation, partially offset by higher production costs.

Our Take

We believe that Lululemon's strategic initiatives coupled with better inventory management and e-commerce business will enhance both the top- and bottom-lines. The company faces intense competition from national and regional competitors such as Nike Inc. (NKE).

We maintain our Neutral recommendation on Lululemon. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no definite directional pressure on the shares over the near term.

 
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