Shares of Lululemon climbed $5.62, or 11.6 percent, to $54.29 Friday in over-the-counter trading after the yoga-themed retailer reported the momentum regained in the first quarter continued through the second. Management raised its guidance for the full year.
The stock’s jump came despite the company announcing a restructuring effort to close the majority of locations of Ivivva, its girls activewear concept. Pre-tax costs totaling $17.7 million were taken in the first quarter to close approximately 40 of its 55 Ivivva branded stores and to convert approximately half of the remaining stores to Lululemon branded stores. All of Ivivva’s branded showrooms and other temporary locations will be closed and its corporate infrastructure will be streamlined.
Ivivva will be repositioned as a primarily an e-commerce focused business, with a select number of stores in key communities remaining open across North America.
On a conference call with analysts, Laurent Potdevin, CEO, said that by August 20, all but eight of Ivivva’s locations will be closed. Potdevin said the restructuring was ”a very difficult decision” given its impact on the Ivivva team but is expected to be accretive to productivity, comps and earnings. He said having a small number of stores “will enable us to continue serving our young Ivivva guests who have come to know and love the brand so much.”
With the charge, earnings in the first quarter slumped 31.1 percent to $31.2 million, or 23 cents a share, from $45.3 million, or 32 cents, a year ago.
Excluding the impact of the Ivivva restructuring, adjusted EPS would have been $44.3 million, or 30 cents, up 8.3 percent from adjusted net income of $40.9 million, or 30 cents, a year ago. Lululemon had projected earnings in the range of 25 to 27 cents a share in the quarter and Wall Street’s consensus estimate had been 28 cents.
Potdevin said the quarter’s above-plan performance was primarily driven by stronger revenue and product margins, driven by part by the payback of investments in its supply chain. Inventories were also well contained, up 6 percent at the end of Q1 and in line with sales growth.
“The actions we’ve taken to build momentum have had an immediate impact on our performance,” said Potdevin. “This positive trend has continued and accelerated as we enter Q2. And as we look to the second quarter, we’re seeing robust performance across all channels and categories with combined comps up in the low-to-mid single digits and digital back to a double-digit comp trend.”
Net revenue in the first quarter climbed 5.0 percent to $520.3 million. On a constant-dollar basis, revenue increased 5 percent. Comparable sales decreased 1 percent on both a reported and constant-dollar basis.
Comparable store sales at stores eased 2 percent and were off 1 percent on a constant-dollar basis. Direct-to-consumer revenue was flat on both a reported and constant-dollar basis.
Gross margin was 49.4 percent, an increase of 110 basis points compared to the first quarter of 2016. Adjusted gross margin was 50.4 percent, an increase of 210 basis points.
SG&A expenses as a percent of sales grew to 38.3 percent of revenue compared to 36.6 percent for the same period last year. The deleverage in SG&A was generally in line with expectations and due to increases in store operating costs, digital marketing, investments in brand and community and IT partially offset by a benefit in foreign exchange relative to last year.
Operating income fell 21.1 percent to $45.4 million with the charge. Adjusted net income expanded 10 percent to $63.2 million.
Citing some highlights for the quarter, Potdevin said women’s delivered “significant comp improvement” and benefited from the expansion of its Naked Sensation offering to include a tight, a crop and a bra. He said overall consumers’ response to its Nulux fabric, which supports Naked Sensation, “continues to surpass our expectations and contributed significantly to our overall women’s bottoms comp in Q1.”
A Mind Over Miles capsule in partnership with Kerri Walsh Jennings, the three-time Olympic Gold beach volleyball player and featured in white was “one of the top five selling style colors this quarter,” he added.
He particularly called out the strong response to the Enlite run bra. Initial performance and reaction from its customers and staff “has been exceptional” with Enlite receiving over 190 million media impressions, exceeding plan by 300 percent, and becoming its leading selling bra.
With Lululemon’s initial findings suggest that a significant number of guests choosing Enlite have not brought a bra from the company before, the category is expected to help the company improve conversion by reaching a broader range of guests. Said Potdevin, “We are now as powerfully positioned in the bra category as we are in women’s bottoms, delivering the most innovative and demanded product in the two categories that define the women’s athletic market.”
Men’s saw a high-single digit gain in the first quarter on top of a 21 percent jump in the year-ago period. Bottoms in men’s climbed 20 percent. Growth in tops accelerated as the quarter progressed with the good response to the launch of the Somatic series training tops in its Intersec fabric. Men’s sales gains have lately been trending back to low-double digits and will be supported in the second quarter by the expansion of its Metal Vent Tech as well as Dash Run tops offerings. Men’s accounts for 20 percent of its total business but they’re just under 30 percent of all new guests.
Lululemon also saw a good response to its first ever global brand campaign, “This is Yoga.” The campaign, which broke May 15, drew 240 million global impressions and another 26 million views of the video online in its first two weeks while also energizing staff and brand ambassadors. Said Potdevin, “The launch of This is Yoga is just the beginning of our global brand amplification as we connect with millions of new guests in key markets around the globe.”
Digitally, Lululemon has surpassed 2 million subscribers and a new creative approach created the retailer’s “highest ever engagement across men’s and women’s and delivered increased conversion.”
Internationally, Potdevin said the company will be accelerating its expansion with 50 store openings this year. Near term, Asia “holds the most significant growth potential,” said Potdevin. In their first few months, Lululemon’s China stores are outperforming all store metrics and currently tracking towards $1,600 in annual sales per square foot.
In Europe, London remains its key focus and is delivering 50 percent sales growth on a constant-currency basis year-over-year
In North America, the company continues to plan for double-digit square footage growth this year and expects to open 30 stores in key destination cities; including New York with a flagship on Fifth Avenue across from the Rockefeller Center as well as locations set for Las Vegas, Los Angeles and Boston.
In connection with the restructuring of the Ivivva operations, Lululemon expects to recognize total pre-tax costs of between $50.0 and $60.0 million in 2017, inclusive of $17.7 million recognized during the first quarter. This primarily relates to long-lived asset impairment and lease termination costs.
For the second quarter, revenues are expected to be in the range of $565 million to $570 million based on a total comp increase in the low-to-mid single digits on a constant-dollar basis. EPS is expected to be in the range of 13 to 15 cents for the quarter. Excluding the impact of the Ivivva restructuring, EPS is projected in the range of 33 cents to 35 cents. In the 2016 second quarter, EPS was 38 cents a share on sales of $514.5 million.
For 2017, revenue is now expected to be in the range of $2.53 to $2.58 billion based on a total comparable sales increase in the low-single digits on a constant-dollar basis. EPS is expected to be in the range of $1.97 to $2.07. Excluding the impact of the Ivivva restructuring, EPS is expected in the range of $2.28 to $2.38 for the year. In 2016, Lululemon earned $2.14 a share on revenue of $2.34 billion.
When it reported fourth-quarter results on March 29, Lululemon said it expected revenue for 2017 to come in the range of $2.55 to $2.6 billion based on a total comparable sales increase in the low-single digits on a constant-dollar basis. EPS had been projected in in the range of $2.26 to $2.36.
Photo courtesy Lululemon