LONDON, UK / ACCESSWIRE / September 7, 2016 / Active Wall St. announces its post-earnings coverage on Lululemon Athletica Inc. (NASDAQ: LULU). The company released its second quarter fiscal 2016 (Q2 FY16) numbers on September 1, 2016. The Canadian yoga-wear maker reported comparable sales growth that fell short of analyst estimates, while also giving somewhat cautious guidance, even as earnings were in-line with expectations. Register with us now for your free membership at: http://www.activewallst.com/register/.

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Earnings Reviewed

For the three months ended on July 31, 2016, Lululemon's net income rose to $53.6 million, or $0.39 per share, compared to $47.7 million, or $0.34 per share, in the corresponding year ago quarter. Excluding a tax and related interest adjustment, earnings came in at $0.38 per share, up 12% compared to the year earlier number and in-line with analysts' estimates.

Lululemon's net revenue rose 14% to $514.5 million, but fell just shy of the expected revenue of $515.5 million. Top-line growth was backed by strong comparable sales growth as well as an expansion of its store base, offset by an unfavorable 1% currency impact. On a constant dollar basis, total revenue increased 15%.

Comps

During Q2 FY16, Lululemon's total comparable sales (Comps) grew 4%, lower from the 6% growth reported in Q1 FY16. Comps, excluding direct-to-consumer results, rose modest 3%, and currency impacts cost Lululemon a percentage point on both measures. Direct-to-consumer revenue climbed by 6%, analysts forecasted comps to grow 5.8%.

Inventory declined 1%, which is somewhat in-line with the company's objective to clear inventory as much as possible via promotions. Promotions can negatively impact margins, and while Lululemon has a very loyal customer base, it must contend with the likes of Nike, Under Armour, and The Gap as competitors in the active-wear market.

Cost of goods sold rose by more than $20 million. At the same time, Lululemon has worked to clear out excess inventory, improve its customer experience, and increase online direct sales. To that end, selling, general, and administrative (SG&A) expense rose 24% to $180 million, and increased to more than a third of sales for the period.

Gross Margin Improves

For Q2 FY16, Lululemon reported that gross margin expanded by a substantial 260 basis points (bps) to 49.4%, owing to a 360 bps improvement in product margins due to lower product costs and reduced markdowns, but offset by unfavorable currency impacts. The company attributed the improvement in gross margins on its efforts made in the last two years toward enhancing its supply chain and sourcing structure, which positions it for global expansion. However, operating income margin contracted 30 bps to 14.4% on higher SG&A expenses due to increased in-store and support center employee costs and higher investments.

Store Update

During Q2 FY16, Lululemon opened six net new company-operated stores, including one in Canada, one in Asia, one in Europe, and three ivivva stores. As of July 31, 2016, the company operated a total of 379 stores. In FY16, the company expects to open up to 42 stores, up from the previous guidance of 40 stores. Stores openings for the full fiscal will include 11 new international and 12 ivivva stores, with total square footage expanding nearly 12%.

Financials

Lululemon exited its fiscal second quarter with cash and cash equivalents of $535.4 million, inventories totaling $277.3 million, and stockholders' equity of $1,156.2 million. The company ended the second quarter of fiscal 2016 with $535.3 million in cash and cash equivalents compared to $541.3 million at the end of the second quarter of fiscal 2015. Inventories at the end of the second quarter of fiscal 2016 decreased by 1% to $277.3 million compared to $280.6 million at the end of the second quarter of fiscal 2015. The Company ended the quarter with 379 stores.

Trend-wear Story

After facing a potentially catastrophic quality-control issue, the company had to work hard in order to restore customer confidence and loyalty, and it took a long time for Lululemon to make its way back toward a faster growth trajectory. Lululemon has largely moved past missteps of earlier years, including its infamous recall of yoga pants, but has had to contend with fresh criticism of its management. In June, the company's founder, Chip Wilson, renewed his calls for change at Lululemon, asking that the board be declassified so that each of its 12 members can stand for re-election on an annual basis, a criticism he had levied before.

Lululemon also has had to compete with growing competition in the athleisure market from the likes of Nike Inc. (NYSE: NKE) and Under Armour Inc. (NYSE: UA) as well as a raft of upstarts. Earlier this week, German sportswear giant, Adidas AG, unveiled a new line of apparel dubbed Adidas Athletics designed to be worn off the field, while Baltimore-based competitor Under Armour Inc. is planning to debut its first casual-wear line at New York Fashion Week later this month. Lululemon is also facing mounting competition in the yoga-wear market with Nike Inc. and other rivals pushing deeper into this category. To cope with the challenges, the company has been working to develop new products and push beyond the core yoga-practicing customer.

Outlook

For Q3 FY16, Lululemon is forecasting for revenues in the range of $535 million to $545 million, with constant dollar comps growth in the mid single-digit range, while earnings is expected to come in between $0.42 per share and $0.44 per-share. For FY16, the company is projecting sales to be in the range of $2.325 billion to $2.350 billion, which is at the lower end of analysts' expectations at $2.34 billion. Earnings for FY16 are estimated to be in a band of $2.11 per share to $2.19 per share, up from its prior guidance of $2.08 per share to $2.18 per share, whereas the market was looking for earnings of $2.15 per share.

Stock Performance

At the close of the market on Tuesday, September 06, 2016, Lululemon's shares ended the trading session at $67.68, down 1.30% from its previous closing price of $68.57. A total volume of 5.39 million shares were traded, which was higher than its 3 months average volume of 2.12 million shares. In the last six months and previous twelve months, the company's shares have advanced 8.78% and 3.05%, respectively. Since the start of 2016, the stock has gained 28.99%. Shares of Lululemon are trading at a PE ratio of 34.71.

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