Lululemon Athletica Inc. reported higher profits beyond its own estimates, September 1, but sales, while up 14 percent, lagged Wall Street’s estimates by $1 million.

The yoga lifestyle brand and retailer reported net revenue increased by 14 percent to $514.5 million for its fiscal second quarter, ended July 31. Sales rose 15 percent on a constant-currency basis. Total comparable sales, which includes comparable -store sales and direct-to-consumer, increased by 4 percent, or by 5 percent on a constant-dollar basis. Store-only comp sales rose by 3 percent, or 4 percent on a constant-dollar basis.

Direct to consumer net revenue increased by 6 percent to $87.4 million, or by 7 percent on a constant dollar basis.

Gross profit increased by 20 percent to $254.2 million, and as a percentage of net revenue gross profit was 49.4 percent compared to 46.8 percent in the second quarter of fiscal 2015.

Income from operations increased by 11 percent to $74 million from $66.6 million in the second quarter of fiscal 2015, and as a percentage of net revenue was 14.4 percent compared to 14.7 percent of net revenue in the second quarter of fiscal 2015. Income tax expense was $20.9 million, which included a net income tax recovery of $1.9 million related to the Company’s transfer pricing arrangements and the associated plan to repatriate foreign earnings. In addition, there was a related net interest expense of $0.3 million. The effective tax rate in the second quarter of fiscal 2016 was 28.1 percent compared to 29.3 percent in the second quarter of fiscal 2015. Excluding the above tax and related interest adjustments, the effective tax rate was 30.5 percent in the second quarter of fiscal 2016.

Diluted earnings per share for the second quarter of fiscal 2016 came in at 39 cents compared  to 34 cents in the second quarter of fiscal 2015. Excluding the above tax and related interest adjustments, diluted earnings per share was 38 cents for the second quarter of fiscal 2016. During the second quarter of fiscal 2016, the Company repurchased 200,000 shares of the company’s common stock at an average cost of $63.65 per share, completing our approved stock repurchase program.

The company ended the second quarter of fiscal 2016 with $535.3 million in cash and cash equivalents compared to $541.3 million at the end of the second quarter of fiscal 2015. Inventories at the end of the second quarter of fiscal 2016 decreased by 1 percent to $277.3 million compared to $280.6 million at the end of the second quarter of fiscal 2015. The company ended the quarter with 379 stores.

Laurent Potdevin, lululemon’s CEO, stated: “The second quarter demonstrated strong results as we delivered sales and EPS at the high-end of our guidance and saw an important inflection in our gross margin and earnings performance.”

Mr. Potdevin continued: “Our progress in the second quarter, especially in gross margin and inventory, marks the beginning of our recovery in profitability and sustainable long term growth.”

Updated Outlook
For the third quarter of fiscal 2016, the company expects net revenue to be in the range of $535 million to $545 million based on total comparable sales in the mid-single digits on a constant dollar basis. Diluted earnings per share are expected to be in the range of 42-44 cents for the quarter. The guidance assumes 137.5 million diluted weighted-average shares outstanding and a 30.5-percent tax rate.

For the full fiscal 2016, the company now expects net revenue to be in the range of $2.325 billion to $2.350 billion based on total comparable sales in the mid-single digits on a constant dollar basis. Diluted earnings per share are expected to be in the range of $2.11 to $2.19 for the full year, or $2.07 to $2.15 normalized for the tax and related interest adjustments made during the first two quarters of fiscal 2016. This guidance assumes 137.5 million diluted weighted-average shares outstanding and a 28.7 percent tax rate, or 30.5% excluding the above tax and related interest adjustments.

Photo courtesy Lululemon