Firing on all cylinders, Lululemon Athletica reported a blow-out fourth quarter marked by a 17 percent comp gain while predicting comps would surge in the low-double digits for the current year. Growth is expected to be driven by stepped-up store openings and category expansions as well as by further building on the recent momentum seen in digital, international and men’s.
“It was another successful quarter for Lululemon as the momentum in our business remains strong,” said Calvin McDonald, CEO, on a conference call with analysts “In fact, these results cap off one of the strongest years ever for the company.”
He said the improvement reflected the payback from strategic investments to support our digital expansion and supply chain improvements but also the retailer’s successful innovations.
Sales and earnings easily topped an upward guidance revision given on January 14.
In the quarter ended February 3, earnings rose 35.8 percent to $245.1 million, or $1.85 a share, from $180.5 million, $1.33, a year ago. On January 14, Lululemon lifted its guidance to a range of $1.72 to $1.74, up from previous guidance of $1.64 to $1.67.
Net earnings came to $218.5 million, or $1.65, against $119.8 million, or 88 cents, a year ago. The adjustments in both periods relate to U.S. tax reform, taxes on repatriation of foreign earnings, and the restructuring of Ivivva operations and its related tax effects.
Net revenue in the quarter climbed 25.7 percent to $1.2 billion. On a constant dollar basis, net revenue increased 27 percent. On January 14, the company raised its sales guidance to a range of $1.14 billion to $1.15 billion from a range of $1.115 billion to $1.125 billion previously.
Excluding net revenue from the 53rd week of fiscal 2018, comps jumped 16 percent, or 17 percent on a constant dollar basis in the latest quarter. On January 14, the comp guidance was raised to an increase in the mid-to-high teens on a constant dollar basis from a range of high-single to low-double digits previously.
In the store channel, comps increased 6 percent. On a constant-dollar basis, comps grew 7 percent on top of a 1 percent increase in Q4 last year. Square footage increased 13 percent versus last year, driven by the addition of 36 net new stores since Q417. During the quarter, 14 stores were opened and nine co-located remodels were completed.
In the digital channel, net revenue in the quarter jumped 37 percent, or increased 39 percent on a constant dollar basis against a 42 percent increase last year. Digital showed its strongest traffic over the year in the quarter. Online contributed $344 million in revenues in the quarter, reaching close to 30 percent of total revenue. For the year, online penetration was 26 percent.
Gross margin in the quarter improved to 57.3 percent from an adjusted 56.2 percent a year ago. The 110 basis point improved was driven primarily by a 170-basis point increase in overall product margin resulting from lower product costs, favorability in product mix and lower markdowns. Occupancy and depreciation expense leveraged 20 basis points. Product and supply chain costs increased 50 basis points given investment in supply chain and product development. Foreign exchange provided a 30 basis point headwind.
SG&A expenses increased to 28.9 percent of revenue compared to 28.4 percent due to continued growth investments. These include digital marketing and seasonal store openings to drive guest acquisition and build brand awareness as well as expanded testing for longer-term growth initiatives, including its new loyalty program and the rollout of Selfcare, its lineup of hair, face and body products.
Operating margin grew 60 basis points versus adjusted operating margin last year and reached 28.4 percent.
Stuart Haselden, COO, said on the call, “The trends we’ve seen all year in traffic, guest engagement and product margin continued and contributed to our nearly 40 percent increase in adjusted EPS in the quarter.”
Haselden said traffic “remained strong” in the quarter to drive comps. In addition, guest engagement remained high with new guest acquisition and email list delivering increases of nearly 30 percent and 70 percent, respectively. A 40 percent increase in transactions was seen by repeat guests.
On product, Haselden said Lululemon’s Q4 mix “continued to be a standout.” Ongoing strength was in both men’s and women’s bottoms, which comped up 28 percent and 21 percent, respectively. McDonald said the core bottoms business is Lululemon’s number one for acquiring new guests, said McDonald, noting its ability to expand sales to other categories.
An expanded outerwear offering also performed well with strong demand for cold weather styles. A collaboration with SoulCycle in January was likely successful. Added Haselden, “I’m particularly pleased with the strength here as it helped us drive full-price sales in a month that is generally thought to be used for clearance at most other retailers.”
Traffic to websites grew over 30 percent in Q4, while conversion increased in the low single-digit range.
Haselden noted that Lululemon partnered with Strava to leveraged its online and physical ecosystems with the third annual 40/80 Challenge. Approximately 200,000 runners joined, representing a 90 percent increase versus last year. Added Haselden, “This was the largest run event by a brand ever hosted on Strava, and we’re excited that with nearly 100,000 members, we are the largest run community on the app.”
Internationally, market growth in Asia was over 70 percent and Europe grew nearly 60 percent. In China, e-commerce continues to be particularly robust, generating an increase of over 140 percent in Q4 and over 150 percent for the full year.
Lululemon’s first stores in Osaka and Macao as well as its first-ever airport location in Hong Kong all opened during the quarter to strong results. In Europe, a new store was opened in the Mitte district of Berlin and the first store in Amsterdam. Stated Haselden, “We’re excited to see accelerating trends now in Europe as our brand awareness levels continue to increase.”
For 2019, McDonald said Lululemon will continue to expand and test category expansions. In women’s, Lululemon will look to build on successes in the past year by expanding further into office travel commute, outerwear, and bra assortment. In men’s, Lululemon recently launched two styles of boxers and the Fast & Free franchise will be expanded into men’s to support warm weather runs. He stated, “Men’s is one of our largest and most exciting areas of future growth, both for our current and new guests going forward.”
McDonald also said the launch of Selfcare has been strong and ”we believe this category holds great opportunity for us and is a natural extension for our brand.”
Overall, McDonald said the overall bottoms category “continues to perform exceedingly well and has proven to be a strong acquisition point into our brand for both women and men.”
On marketing, the CEO noted that a run campaign is being launched to support that category’s opportunity and indicated the company is “thrilled” by the response to its loyalty program that is being tested in Edmonton. A membership test has been rolled out in Denver and will reach another U.S. city in coming months.
On digital, enhancing search, navigation and checkout functionality will be a priority as well as improved brand storytelling. Internationally, local market sites will be launched in Japan, France and Germany
At the physical realm, Lululemon plans to accelerate openings with 40 to 50 company-operated stores expected to open in 2019, up from 36 in 2018. This includes 25 to 30 stores in international markets and represents a square footage increase in the mid-teens range. The retailer also plans to continue its co-located remodel program, build upon the success of its seasonal store strategy and test new formats.
“We will also build upon the strength in our digital channel as we see a pathway for this segment to represent 50 percent of our business in the years to come,” said McDonald.
Internationally, he called out China as an area of particular focus for 2019 and a “significant opportunity” for the company. In Europe, the city-by-city expansion strategy will continue with new markets to be added.
For the year, revenue ran up 24.1 percent to $3.3 billion. On a constant dollar basis, net revenue increased 25 percent. Comps increased 18 percent on both a reported and constant dollar basis. Net income improved to $483.8 million, or $3.61, from $258.7 million, or $1.90, a year ago. Adjusted EPS jumped 48.3 percent to $3.84 compared to $2.59 in fiscal 2017.
Haselden noted that the company achieved three of its 2020 financial targets in 2018, two years ahead of schedule. These include achieving an operating margin of 21.5 percent, a gross margin of just over 55 percent and having e-commerce penetration reach 26 percent. These levels are all at or above the targets set for 2020.
“2018 has clearly been an inflection point for our business in both top and bottom line, and we continue to see clear opportunities to expand on this story by building stronger systems and platforms in supply chain, IT infrastructure, omni capabilities, digital commerce and product development capabilities,” said Haselden. “This sets us on a new course for 2019 and beyond that we are all excited for.”
More details on its growth plan were promised to be shared at Lululemon’s Analyst Day to be held in April in New York City.
For the first quarter, Lululemon expects net revenue to be in the range of $740 million to $750 million based on a total comparable sales increase in the low-double digits on a constant dollar basis. EPS is expected to be in the range of 68 cents to 70 cents, up from 55 cents.
For the full year, revenue is projected to arrive in the range of $3.7 billion to $3.74 billion based on a total comparable sales increase in the low-double digits on a constant dollar basis. EPS is expected to be in the range of $4.48 to $4.55 for the full year.
Photo courtesy Lululemon