BUSINESS

Lululemon lowers revenue forecasts for Q4, beats Q3 analyst profit estimates

12/11/2014 07:20 EST | Updated 02/10/2015 05:59 EST
Canadian yogawear maker Lululemon Athletica warned Thursday that its revenue over the busy holiday shopping season and for the year may be lower than forecast as it grapples with shipment issues on the West Coast and the lower value of the Canadian and Australian dollars.

Lululemon chief executive Laurent Potdevin told analysts the biggest impact will be from the port delays in Los Angeles, which have forced the Vancouver-based retailer to cut anticipated fourth-quarter sales by US$10 million.

"We are continuously assessing the situation and our entire team is focused on supporting the upcoming key holiday selling weeks and maintaining our positive trajectory into January," he said, adding that the company is aware there is a potential for the labour-related delays to snowball into a full-blown strike.

A number of major retailers from luxury retailer Nordstrom to renovations supplier Home Depot have been impacted by the port in disruption in Los Angeles since August, which is a major gateway to move merchandise from Asia to North America.

Lululemon says deliveries of about a million pieces of its merchandise have been delayed between seven and 10 days. Due to the lag, the company is expecting between US$570 million and US$585 million of revenue for the fourth quarter, below consensus analyst estimates of US$593 million as compiled by Thomson Reuters.

Chief financial officer John Currie said Lululemon a contingency plan for future shipments, which would see them routed from Asia to Vancouver and then transported to the U.S. by rail. That is expected to result in delays of between one and three days.

In addition to the port delays, the company also expects to earn US$5 million less in the fourth quarter due the lower values of the Canada and Australia currencies compared with the American greenback, and the delayed opening of its second store in England due to construction problems.

It was initially believed that the location in London's ritzy Chelsea district was going to be ready for the Christmas shopping period. The store is now slated to be up and running in January.

Lululemon now expects fourth-quarter earnings to fall between 65 and 69 cents US per share, compared with analyst forecasts of 72 cents.

Despite the adjusted forecasts, the company reported better than expected earnings results for the third quarter on Thursday, driven by an increased focus on more store openings and finding the right product mix.

In the past quarter, Lululemon opened a new Canadian flagship store in Vancouver, which has increased sales by 50 per cent compared with the older location.

In December it also opened its largest store to date in Santa Monica, Calif., at 5,700 square feet, and a men's only store in New York's Soho district on Black Friday. The retailer's first store in Singapore is just opening and its first store in the Middle East will welcome shoppers in the second half of 2015.

Lululemon said it continues to look to Asia and Europe for most growth potential and remains committed to having 20 stores in Europe and 20 in Asia by 2017.

Potdevin said expanding the brand internationally will only work if the company can get the product mix correct.

In the quarter, the company refreshed its pants and tank top display walls to woo back customers. Lululemon also launched its mobile shopping app this quarter, which has been downloaded 274,000 times, and accounts for about eight per cent of overall online sales.

For the third quarter, Lululemon (NASDAQ:LULU) reported a reduced third quarter profit as it saw lower overall sales growth, partially offset by a 27 per cent jump in online sales ahead of the holiday shopping season.

The company earned US$60.45 million or 42 cents per share for the 13-week period ended Nov. 2, down from US$66.11 million or 46 cents per share in the same period a year earlier.

Analysts had expected a profit of 38 cents per share, according to Thomson Reuters.

Revenue for the period was US$419.4 million, up 10 per cent from last year with a growing portion generated by direct to consumer sales. Comparable store sales fell by three per cent after adjusting for currency fluctuations.

BMO Capital Markets analyst John Morris said Lululemon's Q3 results are encouraging, but it is still unknown whether the company can improve gross margins.

"LULU appears to be making gradual progress on its initiatives on product quality, assortment improvements and guest experience, as sequential improvement throughout the quarter allowed the company to exceed its outlook," he wrote in a note. "However, we still lack visibility on a gross margin recovery given persistent erosion."

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