Lululemon, Inc. management said they were pleased to have met earnings expectations in light of the current economic environment, but the company was not completely immune to its effects. The yoga lifestyle vertical retailer said they have been nimble and creative in responding to the slowdown in consumer demand, while protecting brand integrity.
In a conference call with analysts, company President and CEO Christine Day described one example of leveraging temporary showrooms to “capitalize on market opportunities well outside the reach of our current store base” to drive incremental full price sales while building brand awareness and demand. The temporary showrooms were up and running for approximately six weeks through mid-January.
Total net revenue was $103.9 million for the fourth quarter ended February 1, compared to revenue of $104.0 million in the prior year quarter. Corporate-owned store sales dipped 1.5% for the quarter, representing 87% of total sales, or $90.3 million, versus 88% of total sales, or $91.7 million, in Q4 last year. Franchise and other revenues, which include wholesale, phone sales, showrooms, outlets and warehouse sales, represented the balance of revenues. Comparable store sales declined 22% for the quarter, or 8% on a constant dollar basis. A weaker Canadian dollar reduced reported revenue by 18.9%, or $15.1 million.
Breaking down the results into regions, Day stated that lululemon saw improvement in Texas, the Northwest, Southern California and Chicago. The company opened six stores in North America during the fourth quarter and closed one store in Texas. Lululemon closed its Japenese operations in the second quarter of 2008.
Gross margins fell 470 basis points to 49.7% of net sales in the fourth quarter from 54.4% in the 2007 fiscal fourth quarter. Approximately 280 basis points of the decline was attributable to the deterioration of the Canadian dollar versus Q4 of 2007, which negatively impacted gross margin as a majority of the companys product is purchased in U.S. dollars.
Net income was $10.9 million, or 16 cents per diluted earnings per share, compared to $14.6 million, or 21 cents per diluted share, in the year-ago period. Results include a $4.4 million (4 cents per share) asset impairment charge related to store assets and lease exit costs including stores to be closed, signed leases for stores that will not open, and stores whose expected performance would not support carrying values of store improvement assets.
Excluding the impairment charge, operating income would have been $20.4 million, or 19.7% of sales, compared to $22.3 million, or 21.4% of sales, in the prior year period.
LULU did move aggressively on post-Holiday markdowns to clean up inventory by year-end. The increase is primarily due to $11 million of inventory in transit at year-end.
“We were able to deliver new and fresh inventory in mid-January, in a market where there is an abundance of markdowns and excess inventory,” commented Ms. Day on the conference call.
Lululemon ended the year with 113 total stores compared to 81 stores in operation at the end of 2007. There were 103 corporate-owned stores and 10 franchises, including five operating in Australia. At the end of the fourth quarter there were 66 stores in the comp base, with 37 stores in Canada and 29 in the United States.
LULU opened six stores in North America during the fourth quarter, and closed one store, at the Shops at Highland in Texas. The company also opened one store in December in the Australian joint venture.
A third of the Canada stores have leases up for renewal in 2009, which may provide opportunities for cost reductions.
Looking ahead, LULU sees fiscal 2009 first quarter same-store sales down in the low-double-digits on a constant dollar basis. Revenue is expected to be in the $70 million to $75 million range. Gross margins are expected to be approximately 775 basis points lower than Q1 of 2008, with roughly 300 basis points coming from the weaker Canadian dollar. Earnings per share are seen in the range of 7 cents to 8 cents for the quarter.
LULU will open six stores for the full year, with none in the first quarter.
The company expects sales to continue to rise in the upcoming years as it plans the launch of its new e-commerce system, which is expected to contribute 10% of sales, similar to other retailers with a comparable model. E-commerce may also contribute to lower store inventory levels.
The company will also roll out a new wholesale program in Canada in April, working with yoga studios and specialty shops as it does in the U.S.
