Lululemon Athletica Inc. reported basically flat earnings before special items in the second quarter but earnings were 4 cents ahead of Wall Street’s consensus estimate. Same-store sales grew 7 percent and gross margins expanded 180 basis points.

The company reported diluted earnings per share of 36 cents for the second quarter of fiscal 2017. Excluding the impact of the Ivivva restructuring that was announced on June 1, 2017, the company reported adjusted diluted earnings per share of 39 cents, ahead of Wall Street’s average estimate of 35 cents.

For the second quarter ended July 30, 2017:

  • Net revenue was $581.1 million, an increase of 13 percent compared to the second quarter of fiscal 2016. On a constant dollar basis, net revenue increased 13 percent.
  • Total comparable sales increased 7 percent, or increased by 7 percent on a constant dollar basis.
  • Comparable store sales increased 2 percent, or increased by 2 percent on a constant dollar basis.
  • Direct to consumer net revenue increased 29 percent, or increased 30 percent on a constant dollar basis. During the quarter the company held an online warehouse sale. Excluding the impact of this sale, direct to consumer net revenue increased 15 percent, or increased 16 percent on a constant dollar basis.
  • Gross profit was $297.4 million, an increase of 17 percent compared to the second quarter of fiscal 2016. Adjusted gross profit was $299.7 million, an increase of 18 percent.
  • Gross margin was 51.2 percent, an increase of 180 basis points compared to the second quarter of fiscal 2016. Adjusted gross margin was 51.6 percent, an increase of 220 basis points.
  • Income from operations was $68.7 million, a decrease of 7 percent compared to the second quarter of fiscal 2016. Adjusted income from operations increased by $0.2 million to $74.1 million.
  • Operating margin was 11.8 percent, a decrease of 260 basis points compared to the second quarter of fiscal 2016. Adjusted operating margin was 12.8 percent, a decrease of 160 basis points.
  • Income tax expense was $20.8 million compared to $20.9 million in the second quarter of fiscal 2016 and the effective tax rate was 29.9 percent compared to 28.1 percent. The adjusted effective tax rate was 29.6 percent compared to 30.5 percent in the second quarter of fiscal 2016.
  • Diluted earnings per share were 36 cents compared to 39 cents in the second quarter of fiscal 2016. Adjusted diluted earnings per share were 39 cents compared to 38 cents for the second quarter of fiscal 2016.
  • The company repurchased 1.5 million shares of its own common stock at an average cost of $52.93 per share.

The company ended the second quarter of fiscal 2017 with $721.2 million in cash and cash equivalents compared to $535.3 million at the end of the second quarter of fiscal 2016. Inventories at the end of the second quarter of fiscal 2017 increased by 14 percent to $316.4 million compared to $277.3 million at the end of the second quarter of fiscal 2016. The company ended the quarter with 421 stores.

Laurent Potdevin, CEO, Lululemon, commented: “Our performance reflects the growing global consumer response to Lululemon’s unique position as the leading brand that defines an active, mindful lifestyle. Through continuing to deliver category-defining product innovation, we are creating experiences that our guests, both existing and new, desire. This strong brand momentum reinforces my confidence in our long-term strategy.”

Potdevin added: “The acceleration that we have seen across the business in the second quarter enables us to take another positive step on our path towards achieving $4 billion in revenue by 2020. Finally, I would also like to express my gratitude for the constant energy and determination of our teams and ambassadors, who powerfully bring our brand to life.”

Updated Outlook
In connection with the restructuring of the Ivivva operations, Lululemon expects to recognize total pre-tax costs of between $50 million and $60 million in fiscal 2017, inclusive of $23.2 million recognized during the first two quarters of fiscal 2017. This primarily relates to long-lived asset impairment and lease termination costs.

For the third quarter of fiscal 2017, Lululemons expect net revenue to be in the range of $605 million to $615 million based on a total comparable sales increase in the mid-single digits on a constant dollar basis. Diluted earnings per share are expected to be in the range of 33 cents to 35 cents for the quarter. Excluding the impact of the Ivivva restructuring, we expect adjusted diluted earnings per share to be in the range of 50 cents to 52 cents for the quarter. This guidance assumes 136.3 million diluted weighted-average shares outstanding and a 32.2 percent tax rate, or 30.4 percent excluding the tax effect of the Ivivva restructuring. The guidance does not reflect potential future repurchases of the company’s shares.

For the full fiscal 2017, the company now expects net revenue to be in the range of $2.545 billion to $2.595 billion based on a total comparable sales increase in the low-single digits on a constant dollar basis. Diluted earnings per share are expected to be in the range of $2.04 to $2.11 for the full year. Excluding the impact of the Ivivva restructuring, Lululemon expect adjusted diluted earnings per share to be in the range of $2.35 to $2.42 for the year. This guidance assumes 136.3 million diluted weighted-average shares outstanding and a 30.8 percent tax rate, or 30.3 percent excluding the tax effect of the Ivivva restructuring. The guidance does not reflect potential future repurchases of the company’s shares.

Photo courtesy Lululemon