Analysts Respond to Lululemon's Q4 Upside and 2014 Guidance

Analysts are eager to comment on Lululemon Athletica (NASDAQ: LULU) following Fourth Quarter and Fiscal Year 2013 results.

Summary of Results and Guidance

Lululemon reported $521 million in revenue and $0.75 EPS in constant currency.

• Store revenue increased 5 percent year-over-year. Direct-to-consumer increased 25 percent.
• Gross margin decreased 303bp year-over-year to 53.5 percent driven by a 270bp product margin decline and 30bp of fixed cost deleverage.
• SG&A grew 2 percent to $124.6 million, benefiting from a $9.1 million true-up of accrued incentive compensation and an $11.1 million FX gain.
• First quarter 2014 guidance calls for flat constant currency comps with revenue coming in between $377-$382 million.
• EPS for 1Q14 is expected to be within $1.80-$1.90.

Analysts Response

• ISI Group analyst Omar Saad was impressed by the new CEO Laurent Potdevin's debut on the earnings call on Thursday. Saad commented, “He came across as articulate, strategic, logical, knowledgeable, and organized, and following a year in which LULU was operating with a vacuum in leadership, Potdevin and new Chief Product Officer Tara Poseley have the opportunity to make a nice positive impact on LULU's business over the next year.” The analyst was disappointed to learn that the increased investment will have little allocated to “traditional brand-building activities.”
• Betty Chen from Mizuho reported that she is “encouraged” by the consumer demand for seasonal merchandise. Chen is wary on the potential for increased markdown liabilities long-term given the lower product margin and “increased fashion risks.”
• Topeka Capital Markets analyst Dorothy Lakner is optimistic on Lululemon's future. Lakner wrote, “With a 4Q beat under its belt, product problems behind it, new senior management in place and very conservative guidance now out for 2014, we believe LULU is poised to reclaim its spot as a standout growth story in specialty retailing. New product is being very well received by LULU customers and as the mix skews more towards the seasonal goods they love, we see sales and earnings growth accelerating into 2H14.”
• Andrew Burns from D.A. Davidson commented that he is “encouraged” by the fourth quarter upside and the 2014 guidance. The analyst remarked, “While not dramatic, LULU's strategy shift is clear: incremental brand investments, improved quality controls, accelerated international and ivivva store rollout and more seasonal product. We are encouraged that the long-term mid-twenties operating margin target was reiterated, speaking to potential margin recovery (earnings growth acceleration) in the coming years.” D.A. Davidson reiterated a Buy rating and $64.00 price target.

Shares of Lululemon closed at $48.23 on Wednesday. The stock is currently up 5.95 percent at $51.10.