Shares of leading yoga-inspired athletic apparel and accessories retailer, Lululemon Athletica Inc. (LULU) surged 13.9% as the company’s second-quarter fiscal 2014 earnings of 33 cents per share cruised ahead of the Zacks Consensus Estimate of 29 cents as well as the company’s forecast of 28–30 cents per share.

Results benefited from the company’s ongoing strategic move towards product and brand enhancements and global expansion. However, earnings plunged 15.4% on a year-over-year basis.

Driven by comparable store sales (comps) and store openings, Lululemon’s quarterly revenue advanced 13.4% to $390.7 million, beating the Zacks Consensus Estimate of $377.0 million. Revenues also came ahead of the company’s previous forecast of $375–$380 million.

Comps remained flat during the quarter on a constant dollar basis, including a 30% increase in Direct-to-Consumer comps, offset partially by a 5% decline in corporate comps.

Moreover, Direct-to-Consumer revenues of $63.5 million in the quarter constituted about 16.2% of the total revenue, compared to 14.3% in the prior-year quarter.

Quarter in Detail

Gross profit rose 6% to $197.3 million from the prior-year quarter. However, gross margin contracted 350 basis points (bps) to 50.5% in the second quarter of fiscal 2014, owing to a fall in product margin due to unfavorable sales mix and greater input prices. However, this was partly compensated by improvement in markdowns.

Selling, general & administrative (SG&A) expenses increased nearly 21% to $129.4 million, while as a percentage of sales it expanded 200 bps to 33.1%. Higher SG&A expenses resulted from a rise in operating expenses at new stores as well as higher wages across all stores, increased variable costs for operating the online business and higher expenses at store support center.

Following this, income from operations slumped 14% to $67.9 million while as a percentage of sales, it contracted 550 bps to 17.4%.

Glance at First Half Fiscal 2014

For the six months ended Aug 3, 2014, Lululemon’s earnings tanked 35.2% to 46 cents per share while sales jumped 12.3% to $775.3 million.

Other Financials

Lululemon exited the quarter with cash and cash equivalents of $725.1 million, inventories totaling $176.5 million and stockholders' equity stood at $1,126.7 million.

In the second quarter of fiscal 2014, Lululemon incurred capital expenditure of $26.7 million mainly for the opening of new stores, renovation of existing stores and expenses related to IT and head office capital.

Store Update

During the reported quarter, the company opened 7 corporate-owned stores including 5 in the U.S., 2 Ivivva stores and 1 store in Australia-New Zealand, which was offset by the closure of 1 store in Australia. Overall, the company ended the quarter with a total store count of 270 compared to 266 last year.

Guidance

Lululemon projects third-quarter sales in the range of $420–$425 million on the back of low single-digit comps growth. The company anticipates third-quarter earnings in the 36–38 cents per share range. However, the guidance does not include the impact of planned share repurchases. The current Zacks Consensus Estimate for the same is pegged at 37 cents a share, falling within the company’s guidance range.

For fiscal 2014, Lululemon now expects revenue in the range of $1.78–$1.80 billion with combined comps growth in the low single digits. Earlier, the company had projected revenue of $1.77–$1.80 billion.

Lululemon projects adjusted earnings in the range of $1.72 – $1.77 per share, compared to $1.71–$1.76 per share projected earlier. However, the current Zacks Consensus Estimate stands at $1.78 per share. Including the one-time tax adjustment related to the planned repatriation, earnings for the year are expected to be in the $1.51–$1.56 range.

Other Stocks to Consider

Currently, Lululemon has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Citi Trends, Inc. (CTRN), with a Zacks Rank #1 (Strong Buy), along with Foot Locker, Inc. (FL) and Express Inc. (EXPR), with a Zacks Rank #2 (Buy).

Read the Full Research Report on FL
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Read the Full Research Report on CTRN
Read the Full Research Report on EXPR


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