By Thomas J. Ryan

Lululemon Athletica Inc. (Nasdaq: LULU) continues to outperform its critics, proving it can sustain premium pricing in a crowded athleisure field.

The yoga brand and retailer beat analysts’ forecasts for its fiscal third-quarter profit, helped by a higher-than-expected 420-basis-point jump in gross margin, which reached 51.1 percent of revenue. Net income for the quarter ended October 30, rose 28.4 percent to $68.3 million, or 50 cents per share, exceeding Wall Street’s consensus estimate of 43 cents. Revenue was up 13.5 percent to $544.4 million, ahead of the Street’s average target of $540 million, driven by a 7-percent increase in combined comp sales, continuing momentum seen in the first half. Brick-and-mortar comp-store sales increased 4 percent, while e-commerce comps jumped 16 percent.

Shares of Lululemon bounced 15 percent to $69 per share December 8 following the report.

The one blemish to the strong report was that fourth-quarter results so far have been “mixed” with a soft start followed by a strengthening, as Black Friday sales were up 16 percent and Cyber Monday by 29 percent.

Supply-Chain Improvements
On a conference call with analysts, CEO Laurent Potdevin attributed the gross margin gains to the company’s ongoing focus on its supply chain, including upgrades to its sourcing and logistics structure. Supply-chain issues have plagued the company in recent years. Said Potdevin, “This gross margin expansion is a key element in the earnings recovery that we see today and expect going forward.”

Of the 420-basis-point improvement, 450 basis points reflected increased product margin, driven primarily by higher merchandise margins from lower average unit costs. Markdowns had a nominal impact on margins, with a clearance section of its website helping improved overall clearance margins. Foreign exchange also lifted gross margin by 20 basis points. Offsetting the gains were 50 basis points of investments in its design, merchandising, and supply chain functions.

SG&A expenses grew to 34.1 percent of sales from 32.7 percent, although the net increase moderated from the first half.

Gains In Men’s and Women’s
Among categories, sales benefited from mid-single-digit comp gains in both tops and bottoms within the women’s category, with bra revenue growing more than 20 percent. Standouts in tops and tanks was the Sculpt Tank and the Free To Be Zen and Energy bras. An 11-percent comp gain in pants benefited from last year’s redesign of the pant wall. The Align pant, which uses its exclusive Nulu fabric, has become its number one pant style in less than a year.

Men’s delivered another mid-teens comp gain in the third quarter, consistent with the momentum from the first half of the year. Strong performances in men were seen with its key franchises, ABC Construction, Metal Vent and shorts.

Expansion Plans Move Ahead
Potdevin said the company remains on track with its five-year plan to double its revenue and more than double its earnings. Exploring some key strategies supporting the plan, he said Lululemon’s commitment to innovation is evident in its new outerwear and an expansion of its women’s seamless assortment. Fabric innovation also remains a key focus, plus a “fantastic innovation” coming in the bra category 2017, Potdevin said. More specific innovation for men is being planned.

Regarding its international expansion, three stores are opening in China this month, including two in Shanghai. Two to three stores will open in Shanghai next year. In Europe, an 8,200-square-foot flagship will open on Regent Street in London mid-January.

To support its digital offerings, Lululemon launched store inventory look-up on its mobile app and website. Its EMEA and Asia Pacific sites also underwent a web redesign. Said Potdevin, “We continue to leverage our CRM engine to drive digital marketing campaigns, local store activities and events with deeper segmentation and knowledge of our guests, further enhancing our guest loyalty and experience.”

Lastly, the focus on the North American business continues to be optimizing its store portfolio. In some cases, this involves expansion through co-located stores, which are approximately 5,000 square feet and enable the chain to showcase a broader assortment of men’s lines.

Its reopened Yorkdale store in Toronto features an expanded men’s area as well as personal shop service where shoppers can receive one-on-one personalized consultations and fit session. Since the store re-opened in the quarter, sales are up 35 percent, while the men’s business has increased more than 60 percent. In the U.S., a reopened Scottsdale Quarter store is 60 percent larger and seeing performance similar to the Yorkdale location.

The company also opened its first three “locals,” which are spaces under 2,000 square feet that allow Lululemon to explore smaller markets in a more intimate way. The stores were opened in Fort Collins, CO; Bend, OR; and Sun Valley, ID. Said Potdevin, “We’ve seen tremendous success from our locals concept and have plans for additional locals next year. We believe that this is a strategy that can apply anywhere in the world and is an exciting evolution of our showroom model.”

Promotions and Additions
Potdevin announced a number of additions and changes to Lululemon’s organizational team, including:

  • Celeste Burgoyne, with Lululemon for over a decade, was promoted to EVP, Americas retail.
  • Sun Choe, most recently at Mark Jacobs, joined the company as SVP of global merchandising.
  • Gregg Hurley, most recently from Tesla Motors, and prior to that Apple, was appointed SVP, global store design and development.
  • Garrett Pope, most recently Converse GM for EMEA, became Lululemon’s new GM for EMEA.

Slow Q4 Start Turning Positive
Looking ahead for the year, Stuart Haselden, CFO, noted that like many other retailers, Lululemon experienced a slow start to the fourth quarter in the first three weeks of November. He added, however, “Since then, we’ve seen a strengthening trend into week four, with the Black Friday weekend and Cyber Monday being particularly strong and continuing into December.”

For the fourth quarter, the company expects net revenue to be in the range of $765 million to $785 million based on total comps in the mid single digits on a constant dollar basis. The revenue guidance was about $5 million lower than its previous guidance due to the Canadian dollar now being valued at 74 cents to the U.S. dollar, down from the 77 cents assumed in its prior guidance. Diluted earnings per share are expected to be in the range of 96 cents to $1.01 for the quarter. It earned 85 cents a year ago.

The earnings gain is expected to again be supported by an improvement in gross margins by approximately 300 to 350 basis points over the fourth quarter of last year. SG&A is expected to delever by approximately 150 basis points due to investments associated with brand marketing, digital and IT areas.

For the full year, Lululemon raised its earnings guidance due to the above-plan quarter. EPS is expected to be in the range of $2.18 to $2.23 for the full year, or $2.11 to $2.16 normalized for the tax and related interest adjustments made during the first three quarters of fiscal 2016. Previously, EPS was expected to be in the range of $2.11 to $2.19 for the full year, or $2.07 to $2.15 on an adjusted basis.

Net revenue is now expected to be in the range of $2.32 billion to $2.34 billion, slightly down from a range of $2.325 billion to $2.350 billion. Comps are still expected to advance in the mid single digits.

Photo courtesy Lululemon