By Eric Smith
Shares of Lululemon Athletica Inc. closed the week down $17.57, or 13.4 percent, to $113.87 on concerns over the company’s conservative holiday guidance and also over widespread fear of a tariff resurgence despite talks earlier in the week that the trade war might be dissipating.
Disapproval from investors came after a solid quarter from Lululemon. The company reported adjusted diluted earnings per share for the third quarter of 75 cents, up from 56 cents for the third quarter of fiscal 2017 and ahead of Wall Street targets by 6 cents. Also, net revenue was $747.7 million, an increase of 21 percent compared to the third quarter of fiscal 2017. On a constant dollar basis, net revenue increased 22 percent.
Total comparable sales increased 17 percent, or 18 percent on a constant dollar basis. This included comparable store sales increasing 6 percent, or 7 percent on a constant dollar basis, and direct-to-consumer net revenue increasing 44 percent, or 46 percent on a constant dollar basis.
CEO Calvin McDonald, who just completed his first full quarter in the role, was nonetheless upbeat about the company’s performance in the quarter.
“Lululemon has achieved a high level of success over the past year and has established a solid foundation to continue to build our future,” McDonald said on Thursday afternoon’s earnings conference call with analysts. “It’s been exciting to see guests around the world respond so strongly to our product offerings and improved digital experience. I look forward to what’s ahead for our brand as we strive to exceed the expectations of our guests.”
As for “what’s ahead,” McDonald said the company should start seeing benefits from two key strategies that it is moving forward, both of which leverage Lululemon’s brick-and-mortar strength: “buy online, pick up in-store” and seasonal store rollout.
“The (buy online, pick up in-store) pilot is now live in 35 stores across four markets. It’s proceeding well and helps us leverage our capabilities across channels,” he said. “Our seasonal store strategy is now in full swing for the holiday season, with 43 open at the end of quarter three and six more planned for quarter four. Not only did these stores increase convenience for our existing guests during this hectic time of year, but they also attract a significant number of new guests to our brand. Based on last year’s performance, we expect to see approximately 40 percent of guests in these stores new to Lululemon.”
Something the company began testing in the third quarter also has executives bullish about the company’s ability to increase customer stickiness—Lululemon’s first-ever loyalty program.
“Lululemon has always had a strong connection with our guests, thanks to the great work of our educators, community teams and ambassadors,” McDonald said. “However, it’s clear that we can take these relationships to the next level with the loyalty program. I’m excited to be working with the teams to create an offering that is unique, disruptive and perfect for Lululemon.
“Our current test is taking place in Edmonton. For an annual fee, members receive several benefits, including either a pant or pair of shorts designed exclusively for the program, access to sweat classes, attendance at curated events, personal development and free expedited shipping on e-commerce orders. Initial reads are strong as our Edmonton guests love the program. We’ll have more to share with you subsequently as we continue to pilot and roll out to more markets next year.”
Brick-and-mortar initiatives aside, the company issued guidance for the next quarter that was conservative by most investors’ estimates. Despite this—and despite the hit to shares for Lululemon and other apparel companies—analyst commentary was mostly upbeat. Those who track Lululemon believe that while fourth-quarter guidance is conservative, that makes those targets fairly easy for the company to meet or exceed.
For example, Sam Poser of Susquehanna Financial Group LLLP, wrote in a note to investors: “We see exceptional 3Q18 results as further evidence that LULU remains the best retailer in our and likely any coverage universe. Guidance was once again raised and there are no signs that momentum is slowing. Although 4Q18 SSS (same store sales) guidance (high single digits to low double digits) was arguably lighter than the Street’s 11.4 percent, management noted SSS momentum from 3Q has extended into 4Q. With many of the largest-volume weeks ahead, management opted to err on the side of caution. We are confident that 4Q18 SSS and EPS guidance will be exceeded.”
For the fourth quarter of fiscal 2018, Lululemon said it expects net revenue to be in the range of $1.115 billion to $1.125 billion based on a total comparable sales increase in the high-single to low-double digits on a constant dollar basis.
It is forecasting diluted earnings per share to be in the range of $1.64 to $1.67 for the quarter. The guidance that assumes 133 million diluted weighted-average shares outstanding and a 30 percent tax rate.
For fiscal 2018, the company now expects net revenue to be in the range of $3.235 billion to $3.245 billion based on a total comparable sales increase in the mid-teens on a constant dollar basis. Diluted earnings per share are expected to be in the range of $3.61 to $3.64 for the full year, based on a 30.2 percent effective tax rate.
Photo courtesy Lululemon Athletica Inc.
[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 eric@sgbonline.com or 303-578-7008. Follow on Twitter or connect on LinkedIn.[/author_info] [/author]
