Lululemon Athletica Inc. reported first-quarter results that exceeded Wall Street targets but also announced it would take a charge to close the majority of its Ivivva girls locations.

The Lululemon Athletica reported diluted earnings per share of 23 cents for the first quarter of fiscal 2017, down from 33 cents a year ago. Excluding the impact of the Ivivva restructuring, the Lululemon Athletica reported adjusted diluted earnings per share of 32 cents versus Wall Street’s consensus estimate of 28 cents a share. Lululemon had projected earnings in the range of  25 to 27 cents a share in the quarter.

Lululemon said it plans to operate Ivivva, its activewear brand for girls, as a primarily e-commerce focused business, with a select number of stores in key communities across North America. It plans to close approximately 40 of its 55 Ivivva branded stores and to convert approximately half of the remaining stores to Lululemon branded stores. Lululemon will also close all of its Ivivva branded showrooms and other temporary locations, and will streamline its corporate infrastructure.

It is anticipated that the closures and restructuring will be substantially complete by the end of the third quarter of fiscal 2017. In connection with this restructuring plan, the Lululemon Athletica recognized pre-tax costs totaling $17.7 million in the first quarter of fiscal 2017.

For the first quarter ended April 30, 2017:

  • Net revenue was $520.3 million, an increase of 5 percent compared to the first quarter of fiscal 2016. On a constant dollar basis, net revenue increased 5 percent.
  • Total comparable sales decreased 1 percent, or decreased by 1 percent on a constant dollar basis.
  • Comparable store sales decreased 2 percent, or decreased by 1 percent on a constant dollar basis.
  • Direct to consumer net revenue was flat, and was flat on a constant dollar basis.
  • Gross profit was $256.9 million, an increase of 7 percent compared to the first quarter of fiscal 2016. Adjusted gross profit was $262.3 million, an increase of 10 percent.
  • Gross margin was 49.4 percent, an increase of 110 basis points compared to the first quarter of fiscal 2016. Adjusted gross margin was 50.4 percent, an increase of 210 basis points.
  • Income from operations was $45.4 million, a decrease of 21 percent compared to the first quarter of fiscal 2016. Adjusted income from operations was $63.2 million, an increase of 10 percent.
  • Operating margin was 8.7 percent, a decrease of 290 basis points compared to the first quarter of fiscal 2016. Adjusted operating margin was 12.1 percent, an increase of 50 basis points.
  • Income tax expense was $15.1 million compared to $11.8 million in the first quarter of fiscal 2016 and the effective tax rate was 32.6 percent compared to 20.6 percent. The adjusted effective tax rate was 30.8 percent compared to 29.8 percent in the first quarter of fiscal 2016.
  • Diluted earnings per share were 23 cents compared to 33 cents in the first quarter of fiscal 2016. Adjusted diluted earnings per share were 32 cents compared to 30 cents for the first quarter of fiscal 2016.

Lululemon ended the first quarter of fiscal 2017 with $698.3 million in cash and cash equivalents compared to $550.0 million at the end of the first quarter of fiscal 2016. Inventories at the end of the first quarter of fiscal 2017 increased by 6 percent to $303.9 million compared to $286.2 million at the end of the first quarter of fiscal 2016. Lululemon ended the quarter with 411 stores.

Laurent Potdevin, CEO, Lululemon, commented: “I’m excited to see the positive trends that materialized late in Q1 continuing into Q2. Our current outlook for the remainder of 2017 is strong, and I’m energized by the growth strategies taking shape. I’m also confident in our plans to restructure Ivivva and believe they are the best means to optimize this part of the business.”

Potdevin added: “From our cadence of product innovation, to our enhanced digital experience, and first-ever global brand campaign, we have never felt more deeply connected to our guest or better positioned to expand our collective. We remain laser focused on owning our position as the global brand defining an active, mindful lifestyle.”

Updated Outlook

In connection with the restructuring of the Ivivva operations, we expect to recognize total pre-tax costs of between $50.0 million and $60.0 million in fiscal 2017, inclusive of $17.7 million recognized during the first quarter of fiscal 2017. This primarily relates to long-lived asset impairment and lease termination costs.

For the second quarter of fiscal 2017, we expect net revenue to be in the range of $565 million to $570 million based on a total comparable sales increase in the low-to-mid single digits on a constant dollar basis. Diluted earnings per share are expected to be in the range of 13 to 15 cents for the quarter. Excluding the impact of the Ivivva restructuring, Lululemon expect adjusted diluted earnings per share to be in the range of 33 cents to 35 cents for the quarter. This guidance assumes 137.2 million diluted weighted-average shares outstanding and a 36.6 percent tax rate, or 31.0 percent excluding the tax effect of the Ivivva restructuring. The guidance does not reflect potential future repurchases of the Lululemon Athletica ‘s shares.

For the full fiscal 2017, Lululemon now expect net revenue to be in the range of $2.530 billion to $2.580 billion based on a total comparable sales increase in the low-single digits on a constant dollar basis. Diluted earnings per share are expected to be in the range of $1.97 to $2.07 for the full year. Excluding the impact of the Ivivva restructuring, we expect adjusted diluted earnings per share to be in the range of $2.28 to $2.38 for the year. This guidance assumes 137.2 million diluted weighted-average shares outstanding and a 31.6 percent tax rate, or 31.0 percent excluding the tax effect of the Ivivva restructuring. The guidance does not reflect potential future repurchases of the Lululemon Athletica ‘s shares.

Photo courtesy Lululemon