Lululemon Athletica Inc. (NASDAQ:LULU) reported its financial results for the fourth quarter and fiscal year ended February 2, 2014. The athletic apparel retailer reported better-than-expected results that drove its stock price higher in after-hours trading. It managed to beat analysts' expectations in a Thomson Reuters poll by a meager 3 pennies on the earnings front. The purpose of this article is to delve into the detailed performance of the company and ascertain whether this stock deserves to be invested in.
Top and Bottom Line Performance
- Fiscal Fourth Quarter
Lululemon seems to have regained its growth momentum after it had earned notoriety due to a bungled recall and controversial comments by the ex CEO of the company last year. During the fourth fiscal quarter, Lululemon generated revenues of $521 million up from $485.5 million in the same period last year. However, the retailer managed to earn $109.7 million during the latest quarter, up from $109.4 million in the comparable quarter last year but EPS figure remained flat Y/Y at $0.75. Comparing the latest quarter results to the fourth quarter of 2012 and third quarter of fiscal year 2013 reveals year-over-year and quarter-over quarter performance of the company as illustrated in the table below.
Source: Company Press Releases
A Y/Y comparison reveals that the company has performed better than the comparable quarter last year. Q/Q percent change however shows an even better picture of the company's performance because of the enormous increases in terms of operating income, earnings, and EPS. This leads us to believe that the company has dragged itself out of the controversial arena in which it was caught after it recalled its signature yoga pants that were deemed too sheer to wear. That scenario had halted the company's traffic in the 3rd quarter of fiscal year 2013. Despite the frigid cold and snow during the last two months in the USA and the slow demand during the holiday season, the company managed to report better-than-expected earnings. EPS for the quarter is $0.75 beating the company's own revised guidance for the quarter of 71-73 cents per share.
On the margins front, it becomes evident that the company is struggling to come out of the challenges it faced during the third quarter of this fiscal year. It fell short of the margins it was earning during the comparable quarter last year. The operating margin and net margin improved Q/Q while the gross margin remained flat. Year-over-year margins showed a deteriorating trend with regards to all three margin measures. Moreover, the company's cost of goods sold also increased by 15% outpacing the 7.3% rise in revenues thus causing the gross profit margin to shrink.
Source: Company Press Releases
- Fiscal Full Year 2013
For full year 2013, Lululemon generated revenues of $1.6 billion incorporating a 14% Y-O-Y growth. Operating income and net income figures also surpassed the comparable quarter figures by 4% and 0.30% respectively. Diluted EPS grew by 3.20% year over year. This all implies that the company has not lost its growth momentum over the past year.
Source: Company Press Release
However, the rosy picture shown above does not match to the company's performance in terms of its profit margins as illustrated below. In terms of gross profit margin and operating margin this year, Lululemon lags behind by 290 basis points whereas in terms of net margin, the difference shrunk to 180 basis points. Reduced margins reflect the fact that the company's costs are increasing and outpace the rising revenues. For the full year, cost of goods sold increased by 23.6% that is almost 10% higher than the rise in revenues by 14%.
Source: Company Press Release
Comparable store sales plunged during the latest quarter by 5% however after the Forex adjustment the decrease was about 2%. However, for the whole year the CSS growth was positive but lagged way behind the growth rate the company was enjoying a year earlier. Total comparable sales including both comparable store sales and direct to consumer sales grew 4% and 9% during the fourth quarter and full year 2013, respectively.
Source: Press Release
If we look at the previous year, the company has continually added more square footage and opened stores rapidly as indicated by the number of stores at the end of each quarter demonstrated in the graph below. However the speed of opening new stores and square foot additions have slowed down since the third quarter of fiscal year 2013. The introduction of e-commerce to its direct to consumer sales channel is also a helping hand for the company to expand its customer base and offer an alternative to its store base. During 2013, sales per square foot stood at $1,894, down from $2,058 in the previous year.
Source: Company Press Release
First Quarter Fiscal 2014 Guidance
Lululemon has stated in its earnings release that for the first half of fiscal year 2014 that the company would not be able to meet the demand for its products. This is because the seasonal gear ordered by the company 6-9 months ago would not be sufficient to fulfill its products demand. For the first quarter of fiscal year 2014, Lululemon anticipates revenues of $377 million to $382 million and diluted EPS of $0.31 - $0.33. Comparing this against the company's results posted for the first quarter of fiscal year 2013 gives us a mixed picture. The retailer anticipates a 9 -10% Y/Y rise in terms of revenue for the 1st quarter of fiscal year 2014 but diluted EPS can show a 3% upside as well as downside movement that could be partially because of the 40% rise in diluted weighted average number of shares year over year.
For full year 2014, Lululemon anticipates it will generate revenues of around $1.77 billion to $1.82 billion and a diluted EPS of $1.80 -$1.90. Comparing the guidance with actual results for fiscal year 2013 also demonstrates mix results. Revenues are anticipated to see a rise of 10.6% to 13.75% while diluted EPS is expected to show downside movement hovering from -5.8% to -0.5%. This downside movement may be the result of 0.17% increase in diluted weighted average number of shares.
Despite the company's conservative guidance for the first quarter and fiscal full year 2014, analysts predict a stronger first quarter earnings of 38 cents on revenues of $389.4 billion. For full year 2014, they are expecting earnings of $2.14 per share on revenues of $1.82 billion.
What's Ahead for Lululemon
Under the command of its new CEO Laurent Potdevin, Lululemon is heading towards international expansion and a bolstered product pipeline. During the earnings conference call, the CEO discussed his future plans regarding the company as follows:
"2014 is an investment year with an emphasis on strengthening our foundation, reigniting our product engine, and accelerating sustainable and controlled global expansion."
Lululemon is currently operating in 5 geographies: Canada, the United States, Australia and New Zealand, Asia and Europe. The following graph illustrates that the company is generating more and more revenues from the US and other markets but its contribution from Canada is deteriorating year over year. This situation causes the company to think of expanding in those areas where its product demand is more robust rather than those areas where the brand is fading. In fiscal year 2013, the specialty retailer opened new showrooms in Germany, Singapore, the Netherlands and China. Western European countries especially Scandinavia and those surrounding the Alps could be potential targets for the company.
Europe's economy is recovering at a faster pace and Asia has many countries that offer a vast market for the company's products such as China and India. The global retail sports apparel industry is anticipated to grow at a CAGR of 6% to reach $125 billion by 2017. Growing demand for sports apparel and favorable demographic conditions throughout Asia are seen as catalysts for the market during the forecasted period. This demonstrates that Asia is a very important market for the retailer to expand its business. Moreover, the company's new products are very well received by consumers because it is an athletic inspired casual clothing line that is easy to wear whether exercising or not.
Investors that are not ready to invest in this stock until they hear something great from the new CEO of the company should consider revisiting their thoughts. The CEO has made his plans regarding the company's expansion clear and they seem really enthusiastic and aggressive. With the continuous efforts of the company to launch new product ranges that are fashionable and mobile, this will allow the company to charge premium prices and accelerate the company's profits if it seriously consider cutting its costs. The loyal brand base of the company along with the new followers (once the company becomes available for them) is a key strategic asset of the company that can propel it forward. Rising revenues and profits out of premium pricing and enhanced consumer base can sky rocket the company's stock prices in the future. In essence, Lululemon is a stock worth investing in and is currently trading at a cheap valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.