Lululemon Athletica on Thursday reported that first quarter net revenue rose 5% to $520.3 million from $495.52 million in the year-ago period, beating the FactSet analyst projections cited by MarketWatch for $514 million. Total same-store sales fell 1% and direct-to-consumer sales, including e-commerce, was flat.
The company said it would restructure its kids unit by closing 40 of its 55 Ivivva-branded stores and the converting of half of the remainder to flagship Lululemon-branded stores, while keeping eight Ivivva locations open in key communities, the company said. Sixteen Ivivva showrooms and other temporary locations will also close, and its corporate structure will shift to a primarily e-commerce business. The effort will be substantially complete by the end of the third quarter.
Net income was $31.25 million, down from $45.34 in the year-ago period. Accounting for the planned restructuring of the Ivivva unit, Q1 adjusted diluted earnings were 32 cents per share, up from 30 cents per share in the year-ago period and handily besting the FactSet expectation for 28 cents per share cited by MarketWatch. Shares in the retailer surged by as much as 15% late Thursday.
Last quarter Lululemon faltered on a bland spring merchandise selection but recovered nicely, with more colorful garments and a best-selling bra made of proprietary fabric — that Lululemon specialty. Lululemon years ago proved that it could persuade sun salutation practitioners to buy yoga pants for $100 and more; now it’s tagged that price onto a sports bra.
“We’re really excited. It’s our most expensive bra in our portfolio,” Lululemon Vice President, Global Merchandising Sun Choe told analysts Thursday, according to a transcript from Seeking Alpha. “We have seen zero price resistance. But what we’re finding is that if we have a technical solve and we’re differentiated in the market, she’s willing to pay the price.”
But, while it got warm smiles from Wall Street on its report, the company is also coming off a period of tamped-down expectations. “It was never feasible for Lululemon to continue posting stellar increases ad infinitum, especially against the backdrop of a crowded and competitive market,” GlobalData Retail Managing Director Neil Saunders said in a note emailed to Retail Dive. “When set in this context, the numbers are not so bad and have topped previously issued guidance.”
Lululemon is throwing in the towel on its kids line, which, though not quite so high-priced as its men's and women’s offerings, is still far above what can be found at Gap or Target. “We are not particularly surprised by the decision to streamline Ivivva,” Saunders said. “While there is some demand for athletic wear for younger girls, the level and frequency of that demand is insufficient to support a network of expensive stores” in a competitive marketplace.
When it comes to yoga wear and athleisure in general, competition is stiff, and the market is maturing, but Saunders said that Lululemon is “holding its own.”
“Over recent months, there has been widespread concern that Lululemon would be affected by the slowdown in the athleisure space,” he said. “Although this slowdown is still running its course, we are encouraged that it is not impacting Lululemon to a major extent. This is evident in the trends across the quarter which saw growth strengthen towards the end of the period and into the early part of quarter two.”
After favoring its brick-and-mortar business, which leveraged sales through yoga classes, Lululemon is accelerating its e-commerce, executives said. Quarter-to-date trends online are trending in the positive low double digits and the company sees additional opportunity ahead, CFO Stuart Haselden told analysts. The company’s digital sales aren’t undergoing the margin hits that many retailers' have. The effort includes site optimization, visual merchandising, improved social engagement and digital marketing, which have all made an impact that executives said will bringing digital same-store sales from flat to low double digits.
The company also sees opportunity in Asia, particularly in China, where its sales through Alibaba’s TMall marketplace doubled in less than three quarters. Lululemon is planning more stores in the region than in Europe, where the company has grown 50% year-over-year.
For the full fiscal 2017 year, the company now expects net revenue to range between $2.53 billion and $2.58 billion, based on a total same-store sales increase in the low-single digits on a constant dollar basis.