Lululemon Turnaround Stalls as Margins Slip

Lululemon Athletica Inc. (NASDAQ: LULU) reported third-quarter 2015 results before markets opened Wednesday. The yoga gear maker posted adjusted diluted earnings per share (EPS) of $0.35 on revenues of $479.7 million, compared with diluted EPS of $0.42 on revenues of $419.4 million in the same period a year ago. The consensus estimates called for EPS of $0.37 on revenues of $482.13 million.

On a GAAP basis, excluding tax- and interest-related adjustments, the company posted EPS of $0.38.

Total comparable sales, including direct sales to consumers, increased by 9% year over year on a constant dollar basis. Same-store sales rose 6% and direct-to-consumer sales rose 21%, also on a constant dollar basis. Direct-to-consumer sales now make up 18.6% of Lululemon’s total sales, up from 18.4% in the same period last year.

Gross profit fell from 50.3% in the year-ago quarter to 46.9% in the third quarter of 2015, and SG&A expenses rose from 30.9% to 32.7%. Operating income slipped from 19.4% of net revenue to 14.2%.

The company now expects fourth-quarter diluted EPS in the range of $0.75 to $0.78 on revenues of $670 million to $685 million. Consensus estimates called for EPS of $0.86 on revenues of $689.99 million. In the year-ago fourth quarter, Lululemon posted EPS of $0.78 on sales of $602.49 million.

Lululemon lowered the high-end of its outlook for full fiscal year revenue from a prior range of $2.025 billion to $2.055 billion to a new range of $2.025 billion to $2.04 billion. Adjusted EPS guidance was also reduced, from a prior range of $1.87 to $1.92 to a new range of $1.78 to $1.81. The consensus estimates call for full-year EPS of $1.90 on revenues of $2.05 billion.

The company repurchased 1.6 million shares of its stock in the second quarter at an average cost of $55.50 per share, for a total of nearly $89 million.

The company’s CEO, Laurent Potdevin, said:

We had a solid quarter in line with our expectations underscored by the combination of our product, guest and community initiatives along with tremendous guest reception to major store openings around the world. … We’ve implemented critical organizational changes this quarter and now have in place a complete, world-class management team that is aligned with our strategic global priorities focused on design and dedicated to creating long-term value.

A lighter-than-expected third-quarter outlook reported in September erased Lululemon’s 18% share-price gain for the year to date. Since then the shares plunged to a year-to-date loss of more than 20% before recovering to close on Tuesday down about 6.5% for the year. Wednesday morning’s report, and especially the revised outlook, is likely to put even more down pressure on the stock.

Lululemon’s shares traded down about 8% in Wednesday’s premarket session, at $48.00 in a 52-week range of $43.14 to $70.00. The consensus price target before the report was $63.94, and the high target was $85.00.
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