Lululemon (LULU) reports its 3Q11 on December 1. The Street expects the company to earn $0.25 per share (+39% y/y) on $236 million in revenue (+34% y/y).
Last quarter, the company posted net revenue of $212.3 million (+39% y/y), in which comparable store sales were up 20% y/y. Gross margin was 57.5% compared to 52.8% in 2Q10. EPS was $0.26 per share, vs $0.15 per share a year ago. For the upcoming quarter, the management expects revenue to be in the range of $225 – 230 million and EPS to be $0.22 – 0.24 per share.
Over the past quarter Lululemon made several strategic moves to expand its geographic reach and product mix.
Earlier this month, Lululemon launched its Ivivva.com’s U.S. online store. Ivivva.com is a separate brand created by Lululemon to target younger consumers, hoping to generate brand loyalty so they would trade up to the Lululemon products in the future. The concept is similar to that of Abercrombie's (ANF) Hollister, Gap’s (GPS) Old Navy, and Victoria’s Secret’s (LTD) Pink.
Ivivva.com features dance and athletic apparel for active girls and is strategic to Lululemon’s future growth because it (1) allows the company capture a younger consumer segment in a bigger market and (2) gathers regional buying trends and consumer behavior to map out future store expansion in the U.S.
In addition to launching Ivivva.com, the company introduced new dance apparels (eg, tutus, legwarmers, bags, tights) to attract new consumers by leveraging the strong brand that it established in the yoga and Pilates segment. In the near-term, I do not expect the dance apparel to generate large consumer appeal because many consumers associate Lululemon with its core products in yoga and Pilates. However, with proper marketing and word-of-mouth, the new product line could gain traction in the long-term.
While Ivivva and new product mix expand the company’s offering and geographic reach, the weak North American economy, which affects 93% of the company’s revenue, is the biggest overhang heading into the earnings.
In Canada, Lululemon’s home market, unemployment in Canada increased to 7.3% in October from 7.1% with private sector jobs declining for three straight months. The U.S. is also facing a high unemployment rate of 9.1% and the weekly jobless claims is stubbornly stagnant at 400K. Unless we see improved job market and consumer confidence, sales in both the U.S. and Canada could see moderation as consumers are unable to justify spending $100 on a pair of yoga pants.
Finally, for the remainder of the year, operating margin (~27%) could be under pressure and might not be sustainable due to rising input cost and global expansion.