Lululemon Doubles Second Quarter Net Income; Expansion Continues

Including the impact of a stronger Canadian dollar, comps grew 18%.
Merchandise margins improved in part due to refunds of access duty payments, but also despite markdowns from clearance activities in July.  However, higher occupancy and depreciation costs related to new stores reduced overall gross margins by 120 basis points to 51.9% of sales. Investments in personnel in the production, merchandising and distribution departments also hurt margins.

 

SG&A expense were reduced to 33.7% of revenues from 35.4% due primarily to lower options expense and leverage on its corporate headquarters expenses. Operating margin overall improved to 18.2% from 17.7% in Q207.

The latest quarter included a previously-announced charge of $1.2 million, or 2 cents a share, resulting from the company’s closure of its stores in Japan. Excluding this charge, earnings from continuing operations jumped 124% to $12.3 million, or 18 cents a share, from $5.5 million, or 8 cents, a year ago.

Inventory at the end of the quarter was $43 million, up 82% from a year ago and in line with plan.
Regarding merchandising, the bottoms business “remains strong and our jacket business is stronger than ever,” according to Sheree Waterson, EVP, general merchandise management and sourcing.  Particularly standing out were new novelty jackets for fall.  Outerwear, entering its second season for the company, “has also gotten off to a great start,” said Waterson.

Another strong trend is running, which has been shifted from a seasonal to year-round category. “Our ability to combine femininity and fashion with technical fabrics and construction has resulted in the success of our running in this year,” said Waterson.

Of the ten stores opened during the quarter, its Calgary store has already become one of Lululemon’s top ten performers. Stores opened in Troy, MI and Halifax “continue to perform exceptionally.” A new store opened in New York City at 66th street and 3rd Avenue “has been a huge initial success in spite of the rain.”  Another 22 stores will open during the rest of the year in North America, including several infilling current markets in New York, Southern California, Texas, DC, Chicago and Seattle.

John Currie, CFO, said new stores are “performing pretty much in line with our plan.”  Six new stores that entered the comp base during Q2 were well above the minimum goal of $750 per square foot.
Christine Day, Lululemon’s president and CEO, said the company’s increased clout provided by its growing store base and brand equity is helping LULU land good real estate locations. 

 

 Also, through regression analysis model and demographic mapping tools, “we have learned that we are most successful when we penetrate the heart of a city or region in hip urban areas and then work our way out to the suburbs and we will apply this strategy more consistently to our store openings in the future.”

Lululemon also reiterated its guidance for the year calling for revenues between $380 million and $385 million and earnings between 68 cents to 71 cents per share. In 2007, the company earned 45 cents a share on sales of $275 million.

Separately, Lululemon’s founder Chip Wilson announced plans to transfer about $11 million in restricted stock to an undetermined number of founding employees. Asked during the Q&A session whether he had any plans to sell the rest of his shares, Wilson noted that he had already raised substantial amounts through initially selling to a private equity firm and more in LULU’s IPO. He also admitted that he wouldn’t “know what I would do with the extra money,” and reaffirmed his commitment to working at Lululemon.

“I am in the company every day. I am in Washington today, went to three stores yesterday and took all the educators out for breakfast and design meeting last night It is what I love to do and I dont know what else I would do,” said Wilson.