On Thursday, Lululemon Athletica (NASDAQ:LULU) reported its first-quarter earnings for fiscal 2020. For the quarter, the company reported an adjusted EPS of $0.22 on revenues of $651.96 million. The company missed analysts’ revenue expectations by 5.3%, while its adjusted EPS was slightly lower than analysts’ expectations. The lower-than-expected first-quarter performance made investors skeptical about future growth. As a result, Lululemon stock fell. The company was trading over 5% lower in after-hours trading on Thursday.
Lululemon’s Q1 revenue growth
In the first quarter, Lululemon’s revenue declined by 16.7% from $782.3 million in the first quarter of 2019. The COVID-19 outbreak and related temporary store closures lowered the company’s sales. Meanwhile, growth of 68% in e-commerce sales offset some of the declines. The company’s management didn’t disclose the SSSG for the quarter. Management said that the SSSG won’t be meaningful. Most of the stores were closed for a significant amount of time. In the previous fourth quarter, the company added 34 new stores, which increased its square footage by 15%. During the quarter, the company opened four new stores and closed six.
Meanwhile, e-commerce sales generated $352 million in revenue, which formed 54% of the company’s total revenue. The growth of 40% in traffic and an improvement in conversion by 25% drove the company’s online sales. Management credited its investments in digital marketing and a channel shift for traffic growth. Meanwhile, enhancing guests’ experience through investing in global digital platforms and guests’ positive response to the company’s innovative products improved the conversion rate.
Lululemon’s adjusted EPS fell
Compared to the first quarter of 2019, Lululemon’s adjusted EPS declined by over 70%. The lower revenue and a decline in the EBIT margin dragged the company’s EPS down. However, a lower effective tax rate and share repurchases in the last four quarters offset some of the declines. The EBIT margin declined from 16.5% to 5.0%. Lower gross margins and higher SG&A expenses dragged the company’s EBIT margin down.
Lululemon’s gross margin declined by 2.6% despite an increase of 1.8% in the overall product margin due to lower product costs and a favorable product mix. Increased occupancy and depreciation expenses and higher product and supply chain costs lowered the company’s gross margin. SG&A expenses increased from 37.4% of the total revenue to 46.3%. The deleverage from fewer sales due to store closures and employee payment even during the lockdown increased the company’s SG&A expenses.
For the quarter, Lululemon’s effective tax rate stood at 15.6% compared to 26.4% in the first quarter of 2019. Also, in the first quarter, the company repurchased $64 million worth of stocks. At the end of the quarter, approximately $264 million was left in the company’s share repurchase program. Moving to the balance sheet, the company had $823 million in cash and cash equivalents as of May 3. The company can also avail $400 million of revolving credit facility. So, at the end of the quarter, the company had $1.2 billion of liquidity.
Analysts’ reactions were mixed on Lululemon’s first-quarter earnings. B. Riley FBR, Piper Sandler, Credit Suisse, and Jefferies have raised their target prices, while RBC cut its target price from $360 to $348. B. Riley FBR increased its target price from $290 to $317, while Piper Sandler raised its target price from $360 to $365. Credit Suisse has hiked its target price by $100 to $315, while Jefferies hiked its target price by $96 to $290.
As of June 11, analysts’ consensus target price stood at $293.03, which represents a fall of 4.9% from its current stock price. Wall Street is still bullish on Lululemon. Among the 34 analysts, 64.7% recommend a “buy,” while 35.3% recommend a “hold.” None of the analysts recommend a “sell.”
Although Lululemon reported lower-than-expected first-quarter earnings, I’m still bullish on the stock. As countries across the world start to lift restrictions, Lululemon has started to reopen its stores. As of Wednesday, the company has reopened 295 stores globally. Meanwhile, the company has been investing to improve the functionality and speed of its sites to enhance guests’ experience. The company hopes to quadruple its e-commerce business from its 2018 levels by 2023. Along with these growth prospects, Lululemon is debt-free. The company has liquidity of over $1.2 billion, which makes the stock a strong “buy.” So, I think that investors should look to accumulate the stock on dips.