Showing no signs of taking a breather, Lululemon Athletica reported earnings rose 47.7 percent in the third quarter on an 18 percent comparable-store gain in constant dollars. The chain also indicated it’s getting closer to opening its first stores in Asia and Europe.
Earnings came in at 39 cents a share, exceeding its projected range of 34 to 36 cents given in early September in reporting second-quarter results. Sales climbed 37.5 percent to $316.5 million, surpassing its projection in the range of $300 million to $305 million. Comps had been predicted in the low to mid teens.
“Our robust financial results in the third quarter were largely driven by first-rate execution, beautiful product, community engagement, and continued strength in our e-commerce business,” said Christine Day, CEO, on a conference call with analysts.
The top-line growth was also helped by the addition of 36 net new corporate owned stores since Q3 of 2011: 21 in the U.S., 8 in Australia, 2 in New Zealand and 5 ivivva stores. The company ended the quarter with 201 stores in North America and Australia.
Direct-to-consumer sales increased 89 percent, to $45.1 million. Including e-commerce, comps would have been up 26 percent on a constant dollar basis.
Other revenue, which includes wholesale, showrooms, and outlets, increased 19.0 percent to $19.4 million. Corporate owned stores represented 79.6 percent of total revenue; direct-to-consumer, 14.3 percent; and Other, 6.1 percent.
Gross margins eased slightly to 55.4 percent of sales from 55.8 percent. Investment in innovation and function in product coupled with slightly higher markdowns due to a more normalized inventory position led to a 30-basis-point decline in product margin. he company also saw 60 basis points of de-leverage in product and supply chain team costs due to investments in product development, operations, and supply chain, which is partly offset by a net 50 basis points of leverage on occupancy and depreciation.
SG&A expenses grew 38.0 percent to $ 94.7 million, but still represented the same 29.9 percent of revenues as the prior year. The net increase was due to compensation and operating expenses associated with new stores, showrooms, and outlets as well as increases at existing locations due to higher sales volumes; e-commerce costs and investments, and increased store support expenses. The higher Canadian and Australian dollar increased SG&A by $0.5 million or 0.5 percent.
Inventory at the end of the quarter was 27.5 percent higher but in line with expected sales.
On the call, Day praised several local efforts to engage consumers for the chain’s ongoing success, including a Gospel of Sweat event held at New York City's historic upper west side Riverside Church. In Memphis, 200 yogis practicing on the rooftop of the Peabody Hotel marked the opening of the region’s third store. Its two stores in in Columbus, Ohio came together for a community class, Om-H-I-O, with 500 yogis practicing yoga inside the Ohio State University Oval.
She noted that since entering Columbus as a showroom three years ago, the area has grown from one yoga studio to 15 currently. Said Day. “This speaks volumes to the work both teams have done in their communities to cultivate yoga and be the resource for all things yoga related. It is this authentic connection with our guests and our communities that differentiates us from many other retailers.”
Regarding product, Day noted that the chain has reduced prices of some of its mid-layer run product to increase its appeal to a wider audience.
“The price points of these items may have created a barrier,” said Day, “But like many of our products, we know that when these pieces get into our guests' hands, they will love them so we have repriced some of the pieces to make them more accessible.”
She also the chain focused less on cotton this holiday to increase its emphasis on technical pieces this year. Although the chain may bring back cotton items next year to some of its core merchandise since some tend to be strong gift items, both “the technical product is great and the core business is great.”
In Men’s, Day noted that a shift to a more slimmer, modern fit is broadening that side’s appeal by attracting a younger consumer.
Management also indicated that the creation of 8 small batches, or “capsules,” of products in new categories such as Commute is helping drive ideas across categories. Six are planned for 2013 but each will be “deeper” in scope. Lululemon also recently hired Tom Waller, former head of Aqualab at Speedo, as its new head of innovation to support more technical pieces.
Regarding e-commerce, Day said investments in our social, email, and blog activities are supporting the business while laying the foundation for future growth.
To set the stage for expansion overseas, it recently launched Hong Kong, Singapore, UK, and EU specific websites and also established third-party logistics and distribution centers in Hong Kong and Rotterdam. Based on the success of its two Hong Kong showrooms, Lululemon is actively looking to for a store in that city that will represent its first in Asia. In London, it has one showroom in Chelsea with additional ones planned in 2013. Showroom expansion will expand in Europe and Asia over the next 24 months with other “pre-seeing activities” starting up across 15 countries over the same period. Barbara Le Marrec, formerly head of Starbucks operations for Japan, has joined the company to help lead these international efforts.
For the fourth quarter, revenues are expected to be in the range of $475 million to $480 million with comps expected to rise in the high single digits on a constant-dollar basis. EPS is expected to be in the range of 71 to 73 cents for the quarter, up from 51 cents in Q411.
“We experienced a slower start to the fourth quarter as we were not immune to the consumer distractions that negatively impacted many retailers for the first half of November,” said Day. She also noted that problems with e-mail product notifications impacted some grassroots marketing efforts early in the quarter but has been resolved.
Still, she remained optimistic about Lululemon’s mercandise mix for the holiday, noting that early accelerated gift card sales are “indicating we are on many gift lists this holiday.”
For the full year, Lululemon now expects revenue to be in the range of $1.36 billion to $1.37 billion with EPS expected to be in the range of $1.81 to $1.83.
