Shares of Lululemon Athletica tumbled last week after the yoga apparel retailer lowered its sales outlook for the year even as it reported higher third quarter earnings. Late deliveries; slower traffic and a weaker Canadian are said to be impacting the fourth quarter.
In over-the-counter trading last Thursday, shares fell 11 percent to $60.89.
The Vancouver-based company, which has been under fire this year for product snafus and controversial statements made by its founder, said it estimates revenue for the year to be between $1.605 billion and $1.61 billion. In September, it predicted yearly revenue in the range of $1.625 billion to $1.635 billion.
Earnings for the year are now expected to be between $1.94 and $1.96 per share, slightly narrowed from its previous forecast of $1.94 to $1.97. In 2012, it earned $1.85.
In the third quarter ended Oct. 31, earnings rose 15.2 percent to $66.1 million, or 46 cents a share, ahead of previous guidance calling for earnings between 39 to 41 cents a share.
Net revenue for the quarter climbed 20.0 percent to $379.9 million, boosted by the addition of 46 net new corporate owned stores since Q312. Comps increased 5 percent on a constant dollar basis. Direct to consumer revenue increased 37 percent to $62.0 million, representing 16.3 percent of total company revenues.
Gross margins in the quarter eroded to 53.9 percent from 55.4 percent a year ago. Product margins declined 220 basis points, due primarily to higher airfreight spend to improve product flow, product mix and an increase in its inventory reserves. That was offset with 30 basis points of leverage from occupancy and depreciation and 40 basis points of leverage and product and supply chain team costs due primarily to timing of spend.
SG&A expenses were 29.6 percent of revenue, down from 29.9 percent a year ago. Investments in store labor and operating expenses associated with new stores, showrooms and outlets and e-commerce investments offset a weaker Canadian and Australian dollar which decreased the SG&A margin by 2 percent.
On a conference call with analysts, John Currie, Lululemon’s CFO, said the third quarter went “pretty much” as planned.
“We started the quarter running at a low single-digit comp rate as delivery issues caused us to keep summer goods on our floors through August when we normally would've set our fall product,” said Currie. “The Black Loon Never Out program in bottoms drove sales in August and September and particularly in our tight silhouettes in both solid and patterns as our guests loved our technical seamless fabric for yoga and both tops and bottoms. The quarter got progressively better in October with the strongest month.”
Currie said the company continues see positive customer feedback from its new Full-On Luon, now available in all type bottom styles. But the company still experienced a soft start to the fourth quarter.
One issue was that due to backend quality control filters at the distribution centers set up by a new supply chain team, some styles had been rejected and not released to stores. The late product deliveries that impacted Q3 have also continued resulting ”in uneven product flow and in some cases cancellation of purchase orders. We know that any lost sales incurred during the fourth quarter resulting from this increased focus on quality is a smart investment for the long-term health of the business.”
Finally, Currie said Lululemon is seeing a slowdown in traffic at its stores.
“Our best guess is that this is a result of a combination of causes,” said Currie. “There is a difficult macro retail backdrop with all retailers experiencing lower traffic, but it would be naive to think that the company specific issues that we have been dealing with this year, from the Luon setback to the recent negative PR issues, have not also had some impact. The combination of traffic and product issues resulted in a lower expectation for fourth-quarter guidance.”
Regarding expansion, Lululemon opened 17 Lululemon stores in the US, 2 in Australia-New Zealand and 2 Ivivva stores in the quarter. New store productivity remained approximately $1,100 per square foot, which contributed positively to the third-quarter performance. It ended the quarter with 247 total stores versus 201 a year ago.
To prepare for international expansion, Lululemon opened two more showrooms in Asia in the third quarter, one in Hong Kong and one in Singapore, as well as two more showrooms in Europe, both in Germany. At the end of the quarter, Lululemon operated 63 showrooms which include 5 in Asia, 7 in Europe, as well as 12 Ivivva locations. LULU is also on track to open its first store in Europe in the Covent Garden area of London in late Q114.
Lululemon also said it’s equipped its associates with handheld POS units for line busting to handle the holiday rush. Mobile e-commerce devices were also added to stores to draw on e-commerce inventory when the store is out of a customer’s size or color. Lululemon also improved its pricing reach over last holiday season with a better assortment of gift giving items and key price point items such as cozy-up style jackets in the $100 range.
For the fourth quarter, Lululemon now expects net revenue to be in the range of $535 million to $540 million based on flat comp growth on a constant-dollar basis. EPS is expected to land in the range of 78 to 80 cents a share for the quarter, which compares to 75 cents a year ago.