Lululemon Fourth Quarter Profits Soar; Sales Per Square Foot Reaches $1,726

Net income jumped 92.5% to $54.8 million, or 76 cents a share, for the fiscal fourth quarter easily exceeding expectations. Due to strong holiday sales, Lululemon in early January raised fourth quarter earnings guidance to between 55 cents and 57 cents a share from a previous range of 46 cents to 48 cents.

“We were able to increase our inventory position throughout the year which allowed us to continue our momentum against more challenging comparisons in the third and fourth quarters while also fueling our e-commerce business in the fourth quarter,” said company CEO Christine Day on a conference call with analysts. “And even though we achieved a strong Q4 comp increase, we still believe there was unmet demand across all product lines in our stores and e-commerce channel.”

Overall revenues were boosted by the addition of a 12 net corporate-owned stores in North America since Q4 2009, the consolidation of Australian operations, and the addition of 35 net showrooms in the U.S. since the prior-year quarter. Day said the 12 new stores opened performed close to the average of all its U.S. stores. She believes the retailer’s “expanded showroom strategy was a major driver of this improvement.” A stronger Canadian dollar contributed $6 million, or 2.5% growth, in sales.

About three quarters of the comp increase came from traffic, about 20% from conversion and the balance from slightly higher average dollar per transaction.

Direct-to-consumer revenue, including e-commerce and phone sales, jumped 152% to $24.6 million. Other revenue which includes franchise, wholesale, showrooms, warehouse sales and outlets totaled $18 million, or the remaining 7.4% of revenue for the quarter.

Day said that e-commerce reached its goal of 10% of overall revenues in just its second year selling online, up from 6% in the prior-year period. She said the company will have a short-term disruption as they re-launch its site at the end of the first quarter, but expects e-commerce will stay at 10% in 2011 and it set a new mid-term target of 15% of sales.  LULU will be transferring its e-commerce platform from its current third party vendor to an in-house ATG platform.

“Given we are still learning a lot about e-commerce and have been perpetually under-inventoried on our site, we know that we are still at the early stages and see a tremendous opportunity to grow this channel,” said Day.

Gross margins increased to 58.5% of sales from 53.9% of sales in the fourth quarter of 2009. Merchandise margin improved 90 basis points. “Although we did incur higher product costs due to inflationary pressures, this was more than offset by reduced markdowns, lower shrink, defective goods and obsolescence provisions and a shift towards our higher margin e-commerce channel,” said Day. Leverage on occupancy and depreciation contributed 290 basis points of improvement. Eighty basis points of the improvement stemmed from the stronger Canadian dollar. SG&A increased 130 basis points to 29.4% of sales due to growth in the e-commerce, Australia, Aviva, and showroom channels.

Inventory at year-end was up 30.3%. The company said the strong fourth quarter was achieved in part by accelerating some deliveries planned for Q1. Even with the additional product, the retailer experienced higher-than-expected sell-through.

“With light deliveries during the first part of Q1 and no opportunity to accelerate product deliveries until April, our sales in Q1 will be limited to a level of growth below the demand that we have seen and, when in stock, continue to see from our guests,” said CFO John Currie.
As a result, first quarter revenue is expected in the range of $175 million to $180 million based on a comp store percentage increase in the low-double-digits on a constant-dollar basis.  LULU plans to open five Lululemon stores in the U.S., one Lululemon store in Australia and one Aviva store in Canada during the first quarter.  EPS is expected between 36 cents and 38 cents a share. In the first quarter of 2010, LULU earned 27 cents a share on sales of $138.3 million.

For the full year, the retailer expects revenues in the range of $885 million to $900 million and EPS in the range of $1.90 to $2.00 for the full year.  LULU expects to open a total of up to 30 corporate-owned stores, including up to three in Australia and two Aviva locations. In 2010, LULU earned $1.69 on sales of $711.7 million.