Lululemon Athletica inc. (LULU) Up 10 Percent On Earnings – Solid 4Q Result Driven by Better Sales & Margin. We are encouraged with LULU’s strong 4Q EPS beat of 85c vs. Street at 80c, w/GM declining only -113bp vs. Street’s estimate of -220bp. Investor focus will likely be on 1Q guide below St. (EPS: 28-30c vs. St. 37c) & FY16 ($2.00-$2.15 vs. St. $2.15) – w/questions on margin performance throughout year, and cadence of comps & margin throughout FY16, opines Cowen.
Lululemon Athletica inc – Analysts react
This morning,Lululemon Athletica inc posted a comp and EPS beat driven by higher-thanexpected gross margins and top-line growth. As we believe had been generally expected, both 1Q16 & FY16 EPS guidance were introduced below Consensus estimates and per our analysis of historical practices, we expect will prove conservative.
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• LULU reported EPS of $0.85 vs the Street of $0.80 and guided to (what we believe was generally expected as) below Street guidance: 1Q EPS of $0.28-$0.30 vs St. at $0.37 and FY16 EPS of $2.05-$2.15 vs St at $2.16.
Executive Summary: 4Q15 reported results show sales momentum exiting 2015 driven by e-commerce acceleration (+33% y/y cc) though as anticipated, inventory levels remain elevated. Revenue guidance for +MSD combined comp appears conservative against 1H compares and the potential for the consumer to return for a robust Fall/Holiday season. EPS variances in 1Q vs. our estimate, however (guide: $0.28-$0.30 vs. our $0.38), along with continued elevated inventory levels (+36% y/y) suggest that Lululemon Athletica inc may take its medicine at the margin line in 1Q to move the remaining hangover product, and is baking in an inflection positive in gross margins in 2Q, in line with prior commentary. We await specific commentary on the call around investments necessary to support new avenues for growth. Though we see the EPS guidance range as achievable, any upside depends on stable consumer trends, on-point product development and rollouts from Creative Director Lee Holman, and a seamless e-commerce launch. Coupled with the need to keep investment elevated, we continue to believe valuation doesn’t appropriately account for execution risk and remain comfortable at Hold for now.
Sterne Agee CRT
Inventory is no concern: As expected, Lululemon Athletica inc ended 4Q15 with elevated inventory levels, up 36.5%. Lululemon is still in the process of clearing the excess inventory from the port disruptions of last year in a methodical manner. We need to hear on the call how much of the inventory is on-hand versus in-transit. On-hand inventory was expected to be in line at the end of the year, while in-transit inventory was expected to remain elevated as more goods were shipped via ocean freight in 4Q15 as compared to air freight (due to the port delays) in 1Q15.
Initial pre-market stock reaction (+5.5% at the time of this writing) is focused on the lulu brand’s momentum, a strong 4Q comp (and more rare yet…a beat to plan & expectations), an improving inventory position, and an initial FY17 (Jan. 2017) EPS guide range which nearly brackets consensus (but does bracket market expectations, in our view). To balance however, 1Q EPS is planned very weak and below consensus (prelim. back-of-the-envelope model suggests $0.29 EPS implies -430bp in y/y OM), assumedly in part as the company narrows its invty. – rev. growth gap. Further, while full-year EPS shows +DD EPS growth, OM is only set to expand by 5bp to 10bp (again, based on our prelim. model), lagging +50bp consensus and overall market hopes that the company could start to meaningfully re-expand this year. This balance between inventories and near-term GM recovery, and the LT roadmap back to 20% OMs (this year ended at 17.9%) will be the key focus for investors we believe, in the context of a current 31x NTM P/E multiple.
4Q beat, inventory improving, guidance assumes margin improvement beyond 1Q: reiterate Buy. There were 3 factors we identified that would be most important in assessing the impact on LULU’s stock – the inventory position, QTD trends and the outlook, with a particular focus on gross margin. While we believed the 4Q result itself would be a non-event, two factors make it highly relevant – 1. the magnitude of the beat at $0.05, with gross margin upside and sales the key drivers, and 2. the better gross margin (down only 113 bp), coupled with lower inventory and guidance that nearly meets the Street at the high-end on a lower comp, sends a positive signal about improving gross margin trends throughout 2016.
EPS guidance is light for both Q1 and FY16. For Q1, EPS guidance of $0.28- $0.30 is below consensus $0.37, including mid-single digit comps and margins -400 bps year-over-year, by our math. For FY16, EPS guidance of $2.05-$2.15 is above our $1.98 but shy of consensus’ $2.16 and implies relatively flattish margins year-over-year. The FY16 guide points to a nice acceleration in margin behavior in 2Q-4Q16 following 1Q weakness.