By Eric Smith
Things couldn’t have gone much better this week for new Lululemon Athletica Inc. CEO Calvin McDonald, whose first earnings call Thursday centered on the company’s stellar second quarter.
In midday trading Friday, shares of Lululemon soared more than $20 (percentage increase in the teens), matching a standout market day back in July when Wall Street analysts unanimously applauded the hiring of McDonald, formerly CEO of Sephora, as the company’s next chief executive.
Though McDonald is only in his second week on the job, the company’s fortunes appear to be have been righted after Lululemon ousted former CEO Laurent Potdevin in February for falling short of the company’s standards of conduct.
“Being the CEO of Lululemon is my dream job,” McDonald said on Thursday afternoon’s earnings conference call with analysts. “I’ve chosen to focus my career on retail and brand building, because I love to work with people, create product and innovate. I’m also an athlete. The opportunity to combine my professional passions with my personal ambitions is what makes this opportunity so exciting.”
McDonald then outlined his plan to “meet as many people in the organization as possible” as he gets to understand his new role.
“In my initial weeks and months I’ll spend time in every part of the organization, in stores, our store support centers, our distribution centers and our guest education centers,” he said. “My approach is to listen and to learn as much as possible about the organization and our guests from the teams across the company and to become grounded in all things Lululemon. This is an exciting time indeed to be joining Lululemon. It’s good to speak with you all today. And I look forward to getting to know you over the coming weeks and months.”
Lululemon’s first quarterly report under McDonald was superb, even if his leadership wasn’t in place when the company achieved these results. Lululemon reported comparable sales increased 20 percent, or 19 percent on a constant dollar basis, in the second quarter ended July 29. The company reported diluted earnings per share of 71 cents up from 36 cents (or adjusted EPS of 39 cents) in the second quarter of fiscal 2017.
Net revenue was $723.5 million, an increase of 25 percent compared to the second quarter of fiscal 2017. On a constant dollar basis, net revenue increased 24 percent.
The company attributed the quarter’s performance to increased traffic in stores as well as increased traffic and strong conversion rates with Lululemon’s e-commerce business. E-commerce traffic increased more than 20 percent while store traffic increased in the high single digits, growing for the fifth consecutive quarter. And e-commerce conversion rates were up in the double digits, helped by a new website that launched at the end of third quarter, said COO and CFO Stuart Haselden.
“We focused on checkout, search, personalization on the website as the areas where we can continue to drive those conversion gains,” Haselden said. “And as you look at the second quarter, if you exclude the online warehouse sales from last year, the comp in e-commerce was really driven equally by traffic and conversion. So, those are the strategies that we have developed and implemented in the recent period that has delivered this acceleration in our traffic trends. And so we’re excited to see a number of ways to extend those to make them bigger, to amplify them, to take them forward. And we feel like we’re really just getting started.”
The company’s omnichannel approach is helping it differentiate, according to Jim Duffy of Stifel, who wrote in a note to analysts: “Lululemon is defining the prototype omnichannel model to which consumer brands should aspire. Innovation is moving the product forward, the retail footprint remains tight, community remains central to the brand, and a growing digital competency is being leveraged for consumer engagement and to drive traffic to stores.”
Sam Poser of Susquehanna Financial Group LLLP also noted Lululemon’s omnichannel strides, writing in a note to investors: “Continued evolution of the digital business, as well as initiatives such as BOPUS [buy online, pickup in store] should continue to drive margin. LULU continues to improve its e-commerce platform and is now focused on increasing speed within its supply chain to drive efficiencies. LULU is in the early innings of these initiatives, and there is a long runway for gross margin expansion, particularly for LULU to leverage fixed costs within the gross margin line.”
Based on the strength of Q2, Lululemon updated the company’s outlook for the third quarter of fiscal 2018. The company now expects net revenue to be in the range of $720 million to $730 million based on a total comparable sales increase in the low teens on a constant dollar basis. Diluted earnings per share are expected to be in the range of $0.65 to $0.67 for the quarter.
This guidance assumes 133 million diluted, weighted-average shares outstanding and a 30 percent tax rate. The guidance does not reflect potential future repurchases of the company’s shares or any adjustments which may be recognized in connection with the U.S. tax reform.
For the full fiscal 2018, the company now expects net revenue to be in the range of $3.185 billion to $3.235 billion based on a total comparable sales increase in the low teens on a constant dollar basis. Diluted earnings per share are expected to be in the range of $3.45 to $3.53 for the full year. This guidance assumes 134 million diluted weighted-average shares outstanding and a 30 percent tax rate. The guidance does not reflect potential future repurchases of the company’s shares or any adjustments which may be recognized in connection with the U.S. tax reform. Fiscal 2018 is a 53 week year.
The expectations remain high for Lululemon and McDonald, with Stifel’s Duffy adding in his note: “We expect Mr. McDonald will be a strong leader for lululemon’s next phase of growth.”
Photos courtesy Lululemon
[author] [author_image timthumb=’on’]https://s.gravatar.com/avatar/dec6c8d990a5a173d9ae43e334e44145?s=80[/author_image] [author_info]Eric Smith is Senior Business Editor at SGB Media. Reach him at email@example.com or 303-578-7008. Follow on Twitter or connect on LinkedIn.[/author_info] [/author]