Keeping its positive earnings surprise streak alive in all four quarters, Lululemon Athletica Inc. (LULU - Analyst Report) ended fiscal 2014 on a spectacular note. Shares of the company jumped 4.9% following the announcement of its fourth-quarter fiscal 2014 results wherein both top and bottom lines beat the Zacks Consensus Estimate.

Quarterly earnings of 78 cents per share cruised ahead of the Zacks Consensus Estimate of 73 cents as well as the company’s forecast of 71–73 cents per share, backed by robust sales. Also, earnings climbed 4% on a year-over-year basis.

Driven by positive comparable store sales (comps), addition of new stores, improving traffic and solid holiday sales, Lululemon’s quarterly revenues advanced 15.6% to $602.5 million, also surpassing the Zacks Consensus Estimate of $599.3 million. Revenues also exceeded the company’s latest forecast of a range of $595–$600 million.

Total comparable sales grew 8% during the quarter on a constant dollar basis, driven by a 20% surge in Direct-to-Consumer sales, coupled with a 5% rise in quarterly comps. The increase in total comps easily surpassed the company’s projection of a 6%–7% rise.

Moreover, Direct-to-Consumer revenues, which surged 17% year over year to $114.5 million, constituted about 19% of the total revenue, compared with an 18.8% rise in the prior-year quarter.

Quarter in Detail

Gross profit ascended 11.2% year over year to roughly $310 million in the fourth quarter of fiscal 2014. However, gross margin contracted 200 basis points (bps) to 51.5% owing to a fall in product margin due to unfavorable sales mix, greater input price, weakening of the currencies in Australia and Canada, and inefficiencies in supply chain networks.

Selling, general & administrative (SG&A) expenses escalated 22.7% to $152.9 million, while as a percentage of sales, the same expanded 150 bps to 25.4%. Higher SG&A expenses resulted from a rise in operating expenses at new stores as well as higher wages across all stores, increased variable costs for operating the online business and higher expenses at store support centers.

However, the impact of improved gross profit compensated for the rise in SG&A, leading income from operations to inch up 2% to $157.2 million. As a percentage of sales, income from operations contracted 350 bps to 26.1%.

Fiscal 2014: A Glimpse
 

Lululemon’s adjusted earnings for fiscal 2014 dipped 1% year over year to $1.89 per share, but fared better than the Zacks Consensus Estimate of $1.81. Including one-time items, earnings for the fiscal slumped 13.1% year over year to $1.66 per share.

Coming to revenues, this Zacks Rank #3 (Hold) company witnessed a 12.9% rise in its fiscal 2014 revenues, which came in at $1,797.2 million. Moreover, revenues beat the Zacks Consensus Estimate of $1,793 million.

Store Update

During the reported quarter, the company opened 13 corporate-owned stores, including 9 in the U.S., 1 Ivivva store and 1 store each in Australia, Asia and Europe, taking the total store count to 302 by the end of fiscal 2014. Going forward, Lululemon plans to open 60 new stores in fiscal 2015.

Financials

Lululemon, which competes with Nike Inc. (NKE - Analyst Report), exited fiscal 2014 with cash and cash equivalents of $664.5 million, inventories totaling $208.1 million and stockholders' equity of $1,089.6 million, compared with $698.7 million, $188.8 million and $1,096.7 million, respectively, at the end of fiscal 2013.

During fiscal 2014, the company spent about $149.1 million to buy back 3.7 million shares. In the fourth quarter, Lululemon repurchased 0.4 million shares worth $17.3 million.

Capital expenditures during the fourth quarter amounted to $30.4 million. For fiscal 2015, the company expects capital expenditures to be in the range of $130–$135 million, allocated toward store openings, relocations and expenses on IT and supply chain initiatives.

Guidance

Management remains pleased with its performance in the reported quarter, which was backed by favorable customer response and improved traffic. In fiscal 2015, the company intends to remain focused on undertaking investments in innovations, product introductions and enhancement of customer experience to drive international growth and maintain its market-leading position.

Despite delivering a solid performance in fiscal 2014, the guidance issued by Lululemon was below analysts’ expectations, owing to the expected negative impact from port labor disruptions at the West coast, weather-related challenges on the East coast and currency headwinds, particularly in Canada and Australia.

For fiscal 2015, the company anticipates sales in the range of $1.97–$2.02 billion on the back of mid single-digit comps growth. Earnings for the fiscal are envisioned in a band of $1.85–$1.90 per share. The current Zacks Consensus Estimate for the same is pegged at $2.06 a share, which might witness a downward revision following the company’s outlook.

For the first quarter of fiscal 2015, Lululemon expects revenues to be in the range of $413–$418 million, with comps growth in the low single-digits. Further, Lululemon expects its earnings for the first quarter to lie in a band of 31–33 cents per share. The current Zacks Consensus Estimate for the same stands at 39 cents per share.

Stocks to Consider

Better-ranked stocks in the same industry include Columbia Sportswear Company (COLM - Snapshot Report) and G-III Apparel Group, Ltd. (GIII - Snapshot Report), each with a Zacks Rank #2 (Buy).