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Coatue Management sells position in Lululemon Athletica

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Dec. 4 2014, Updated 8:00 a.m. ET

Coatue Management and Lululemon Athletica

In 3Q14, Coatue Management sold its position in Lululemon Athletica (LULU). The stock accounted for 0.20% of the fund’s portfolio for the second quarter, which ended in June 2014.

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Lululemon overview

Together with its subsidiaries, Lululemon Athletica Inc. designs, manufactures, and distributes athletic apparel and accessories for girls, women, and men. The company operates in three segments: Corporate-Owned Stores, Direct-to-Consumer, and Other. Lululemon uses the following means to sell its products:

  • corporate-owned and -operated retail store chain
  • e-commerce websites
  • premium yoga studios
  • health clubs
  • fitness centers
  • other wholesale channels

Revenue beats estimates

Lululemon’s net revenue for the second quarter increased 13% to $390.7 million from $344.5 million in 2Q13. Total comparable store sales on a combined basis drove this growth. A flat increase in e-commerce comprised 30% of growth online, while brick-and-mortar store sales declined by 5% on a constant-dollar basis.

The company’s industry peers reported similar increases in revenue. Nike (NKE) noted a rise of 14%, while Adidas (ADDYY) reported 6% quarterly revenue growth year-over-year.

Lululemon ended the second quarter with 270 stores, up from 266 a year ago. There are now 206 stores in the comp base:

  • 39 in Canada
  • 136 in the US
  • 23 in Australia and New Zealand
  • 8 Ivivva stores

Total comparable sales—which include comparable store sales and direct-to-consumer sales—remained flat for the second quarter on a constant-dollar basis. Comparable store sales decreased by 5% and direct-to-consumer revenue increased 30% on a constant-dollar basis.

Gross profit for 2Q14 was 50.5% of net revenue compared to 54% of net revenue in 2Q13. Several factors contributed to this drop in gross margin:

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  • product margin decline of 260 basis points due primarily to a higher sales mix of lower-margin seasonal products and higher input costs, in particular with print and textured fabrics
  • deleverage of 40 basis points from occupancy and depreciation
  • 70 basis points deleverage from continued investment in design, merchandising, and product engine functions
  • deleverage of 50 basis points from the foreign exchange impact on product costs due to the weakening of the Canadian and Australian currencies

Lululemon’s third-quarter outlook

For 3Q14, the company expects net revenue to be in the range of $420 million to $425 million based on a total comparable sales increase in the low single digits on a constant-dollar basis. Lululemon anticipates diluted EPS, or earnings per share in the range of $0.36 to $0.38 for the quarter.

Other 3Q14 activities at Coatue

Coatue Management’s third-quarter 13F filing revealed new positions in Level 3 Communications Inc. (LVLT) and Zillow Inc. (Z). The fund sold its positions in Salesforce.com Inc. (CRM) and 21Vianet Group Inc. (VNET). Coatue also added to its positions in LinkedIn Corp. (LNKD), Baidu Inc. (BIDU), eBay Inc. (EBAY), and Facebook Inc. (FB). The fund reduced its stakes in Charter Communications (CHTR), Liberty Global plc (LBTYA), and CBS Corp. (CBS).

The next segment of this series will discuss the fund’s position increase in LinkedIn.

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