Lululemon says recall will pinch profit
Lululemon Athletica Inc. (TSX:LLL), the iconic Vancouver-based retailer of stretchy workout gear, admits the recent recall of its black Luon pants will put the pinch on earnings but says keeping customer loyalty is paramount.
"Delivering the top quality our guests expect is a critical factor in our differentiation in the market place," CEO Christine Day said in delivering an upbeat fourth-quarter earnings report Thursday that slightly exceeded the expectations of analysts.
"The fundamentals of our business are strong, we delivered excellent results in 2012, and we plan to continue to earn the loyalty of our customers and shareholders every day going forward."
The company, which operates 211 stores in North America and Australia, said earlier this week it was pulling a batch of defective pants from its shelves because of manufacturing failures that made them too sheer.
It said Thursday that the recall will reduce revenue, reported in U.S. dollars, by $12 million and $17 million in the first quarter. It also estimated earnings will be reduced by 11 to 12 cents per share.
But overall, Lululemon is expecting to be profitable in the first quarter with diluted earnings of between 28 and 30 cents per share of earnings and between US$333 million and US$343 million of revenue.
However, that's below a pre-announcement consensus estimate of 44 cents per share of earnings and US$352 million of revenue, according to figures compiled by Thomson Reuters.
In the fourth quarter, which ended before the recall, Lululemon did slightly better than the consensus estimate.
On a per-share basis, Lululemon had 75 cents of net income in the fourth quarter — a penny above the consensus estimate of 74 cents per share.
The clothing company's revenue during the key holiday shopping period was also up, rising by 31 per cent year-to-year to US$485.5 million — in line with expectations.
During the comparable period last year, Lululemon — which reports in U.S. currency — had $371.5 million of revenue and $73.9 million or 51 cents per share of net income.
Day said that black Luon, the company's proprietary fabric, was a very technical and sensitive product to manufacture.
"We have a long history with our manufacturers and as we have in the past, we are working closely with them to resolve the current issues," she said.
For all of fiscal 2013, Lululemon expects net revenue to be in the range of US$1.61 billion to US$1.64 billion and diluted earnings per share to be in the range of $1.95 to $1.99.
The company ended fiscal 2012 with US$590.2 million in cash and cash equivalents compared with $409.4 million at the end of fiscal 2011, while year-end inventory at the end of fiscal 2012 was $155.2 million, up from $104.1 million at the end of fiscal 2011.