Lululemon Athletica inc. (NASDAQ:LULU) needed a solid first-quarter earnings report. With LULU stock sitting near an 18-month low heading into earnings, clearly confidence in the company had turned sour.
Lululemon seemed to post a strong earnings report on Thursday afternoon, but I’m not sure that Q1 results were quite as positive as initial impressions suggest.
Headline numbers did beat consensus, and handily so on the bottom line. Full-year guidance, however, remains largely unchanged. Lululemon isn’t out of the woods by any stretch.
Still, the first-quarter report is enough to build on for Lululemon, and for LULU stock. On its own, it doesn’t change the narrative — or necessarily negate the mid- to long-term bear case. But a 15% after-hours rally makes some sense, it might even be a bit aggressive. At the least, Lululemon Q1 earnings take the worst-case scenario off the table — for now.
Lululemon Q1 Earnings
LULU posted a solid headline beat: Per-share earnings of 32 cents (excluding restructuring charges) was 4 cents ahead of consensus. It also beat out the post-Q4 guidance of 25 cents to 27 cents. Total comparable-sales growth (including online sales) contracted 1%. Still, that was modestly better than Street expectations for a 1.9% decline.
The good news in the quarter is how Lululemon drove the earnings beat. Most notably, adjusted gross margin rose 210 bps year-over-year, clearing 50%. That’s an important figure for LULU stock. Fears of competition from rivals including Gap Inc (NYSE:GPS), through its Athleta brand, and Under Armour Inc (NYSE:UA, UAA) had driven concerns that Lululemon’s pricing power would erode. The ability to drive margins higher while also posting better-than-expected same-store sales will stem those fears, at least for now.
The bad news in terms of Q1 is that the numbers aren’t that great, expectations aside. A decline in same-store sales led SG&A to deleverage — and on its own is a bit disappointing for a company that was supposed to have a multi-year growth runway. Certainly, fears of the “athleisure” trend fading aren’t completely assuaged by the year-over-year decline.
Meanwhile, even excluding restructuring charges, EPS did decline year-over-year. And with an after-hours price of $56 suggesting a 24 times earnings multiple (even backing out $5-plus per share in cash), LULU stock is absolutely not priced for declining profits.
Guidance and Outlook
As far as the first quarter goes, it was good enough to drive some confidence that Lululemon can right its ship. As far as guidance goes, the sentiment seems similar: good enough, but not spectacular.
Lululemon actually pulled down its full-year sales outlook by about $20 million — despite beating its guidance by $5 to $10 million in Q1. EPS guidance was raised modestly, by about 2 cents. But that sub-1% difference appears to come solely from expectations for a modestly lower share count and tax rate.
Given the Q1 beat, the full-year projections actually suggest lowered expectations for Q2-Q4. Indeed, second-quarter per-share earnings guidance of 33 cents to 35 cents is well below consensus estimates of 41 cents for that quarter.
It wouldn’t be surprising to see what are now 14%-plus after-hours gains moderate somewhat considering the more muted full-year commentary. Full-year guidance still sits right around where Street estimates were for the year. EPS of $2.28-$2.38 compared to consensus of $2.32; while revenue estimates of $2.53-$2.58 billion pretty much bracket the Street’s $2.56 billion figure.
The loss of sales from girls’ brand ivivva likely drives the lower outlook, and that aside revenue figures for the year are reasonably solid. But overall, this wasn’t quite the blowout quarter that headlines might suggest.
LULU Stock Still Looks Like an ‘Avoid’
There has been some evidence in fiscal Q2 numbers that brick-and-mortar retail isn’t quite as dead as some investors felt. Wal-Mart Stores Inc (NYSE:WMT), Gap and Best Buy Co Inc (NYSE:BBY) have shown that retailers who adapt to e-commerce still have a chance of surviving in the modern climate.
The question is whether Lululemon will be seen in that light. Online sales weren’t that strong in the quarter, with total comps -1% and in-store comps -2%.
Lululemon’s Q1 needs to be seen as more than just a “relief rally” to justify a 24x EPS. Given relatively unchanged full-year guidance and year-over-year declines in sales and profits, I’m skeptical that’s actually the case.
As of this writing, Vince Martin has no positions in any securities mentioned.