Thanks to higher-than-expected sales from a revamped e-commerce platform, Lululemon Athletica ended a strong year on an even higher note, with results for the fourth quarter ended Jan. 28 largely exceeding analysts' expectations and the company's own guidance. Revenues were up by 18 percent to $928.8 million for the year, well above the range of $905 million to $915 million that the company had predicted, and the stock exchange immediately reacted by sending the company's share price up by 6.5 percent.
On a constant-dollar basis, revenues increased by 16 percent. However, due to the reorganization of its Ivyva business, moving this girls' clothing concept to a mostly online format in order to eliminate its losses, net income declined by 12 percent to $119.8 million, down to a level that also exceeded what analysts had forecast. Net earnings grew by 32 percent to $180.0 million on an adjusted basis, excluding Ivivya and a negative impact of $52.3 million from the U.S. tax reform.
Lululemon's performance was largely driven by investments in its digital and e-commerce business, including “structural changes with transformative investment across people, process and technology,” the management said. It boasted about the improved functionality, the more compelling contents and storytelling and the improved product imagery on its new website, which came live at the end of the third quarter. Since the relaunch, the company recorded a 20 percent increase in site traffic and a 19 percent increase in conversion, with conversion from mobile devices increasing by 21 percent.
The company's comparable sales, which include comparable store sales and the direct-to-consumer business, grew by 12 percent, or by 11 percent in constant currencies. Online sales from its website soared by 42 percent on a constant-currency basis. Another positive initiative was the opening of 24 pop-up stores, where 40 percent of the traffic consisted of new customers for the brand. Their number will be doubled for the 2018 holiday season.
The Canadian brand said that omnichannel remains a critical part of its overall digital strategy. It is now able to ship products ordered online from 186 physical store locations, a number that will grow further in 2018. Lululemon also plans to roll out the ability to buy online and pick up in a store in the second half of the year. It will be adding data analytics this year, focusing initially on customer engagement, the acquisition of new customers and personalization of the products.
Lululemon recently moved into swimwear and running apparel as part of a long-term strategy under which more than half of its revenues should come from products that are not related to its original focus on yoga apparel. Its sales also expanded in the men's category. In 2017, it completed 12 co-location projects where it expanded the size of some of its most productive stores to allow more space for its men's collection, while creating additional space for potential future category expansion. In 2018, Lululemon plans to accelerate this program with approximately 20 to 25 stores in this format.
The management said it recorded market share gains across all categories, channels and geographies, especially in Asia and Europe. In Asia, it saw strength in digital, with comparable sales growing in the triple digits. It continues to go after local e-commerce experiences, soon offering the possibility for customers in China to pick up their orders at a physical store. The company ended the quarter with 23 stores in the region, and it plans to open 15 to 20 new locations there in 2018.
In Europe, Lululemon reached total growth of 42 percent for the latest quarter. In 2018, it plans to open five to 10 stores in the U.K., Germany and France, with four planned for the first quarter alone. The management said it is encouraged by recent trends in Europe and continues to see this region as a major opportunity.
Overall, the company ended the fourth quarter with 404 stores globally, 16 more than at the start of the three-month period. The company wants to open between 40 and 50 more stores in the course of this year, of which 20 to 30 will be overseas.
The quarterly gross margin gained 2.1 percentage points to 56.3 percent, while the adjusted gross margin, excluding the impact of Ivivva's reorganization, was 56.2 percent - an increase of 2.0 percentage points.
The operating margin dropped by 2.7 percentage points to 27.6 percent, but the adjusted operating margin jumped by 2.9 percentage points to 27.8 percent.
For the full year, Lululemon's revenues jumped by 13 percent to $2.65 billion, or by 12 percent in constant currencies, including a 27 percent increase in digital sales. Total comparable sales improved by 7 percent, leading to average sales per square foot of $1,554. The adjusted gross margin rose by 1.9 percentage points to 53.1 percent and the adjusted operating margin inched up by one percentage point to 19.0 percent.
The strong results came a few weeks after the abrupt resignation of Laurent Potdevin from his position as chief executive, on undisclosed charges of misconduct. The management said it is “very confident” in the company's ability to attract a top, proven, global consumer executive, but the board is going to take its time.
Observers feel that one of the candidates for the job might be David McCreight, who has just left the helm of Anthropologie, which is owned by Urban Outfitters. Another possible successor is Stefan Larsson, formerly with Ralph Lauren and Gap. Bloomberg also mentions Carrie Ask, a former Nike executive who is running Levi Strauss' global retail operations.
The company expects revenues in the range of $2,990 million to $3,020 million for the current financial year, based on a total comparable sales increase at a rate in the mid-to-high single digits on a constant-dollar basis. Indicatively, net earnings should reach a level of about $412 million for the year.
