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Lululemon Will Spend More to Air Goods Due to Port Congestion Ahead of Tariffs

Continuing on the heels of a strong first-quarter result, Lululemon Athletica Inc. will invest in both strategic priorities and test initiatives that fuel current and long-term growth, such as in men’s, digital, international, loyalty and self care.

However, chief financial officer Patrick Guido did note that the company plans to air freight more goods to ensure timely delivery to customers in light of tariff-fueled port congestion.

In a Nutshell: Lululemon CEO Calvin McDonald said the company is “excited about the opportunities ahead of us and I look forward to delivering on our Power of Three” five-year vision.”

That plan, announced in April, is to “double men’s, double digital and quadruple international” revenues.

In light of Trump’s increased and proposed tariffs on product from China, Lululemon executives on a conference call said the team has decided that using air freight to stave off delivery delays due to congestion will be a good hedge for third quarter deliveries.

The company is anticipating port congestion around the mid-July timeframe as companies try to get product in ahead of potential new tariffs, and in order to protect its fall sales, Guido said the move to “air in merchandise to avoid congestion at the ports” will occur in the back half of the year, with the majority of that occurring in the third quarter.

Stuart Haselden, the company’s chief operating officer, who also is responsible for international oversight, said market growth in China was up nearly 70 percent, with the e-commerce business up over 100 percent. Lululemon relaunched its website in China to complement the brand’s presence on Tmall and WeChat. The company opened new stores in three Chinese cities–Chong’xing, Xi-an and Xiamen–and plans to open another 10 to 15 doors in China this year.

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As for the first quarter, McDonald said Lululemon had strong guest response to its product assortment, both in men’s and women’s categories. The CEO said the company’s focus over the last several years on creating an efficient and segmented supply chain is “paying off.”

In women’s, strength was seen in bottoms, which remains one of the company’s strongest categories, driven by both legging and jogger styles. In men’s, comps were up 26 percent thanks to strength in tops and bottoms. In bottoms, three core short styles are resonating with consumers: T.H.E. Short, Pace Breaker and Surge. Lululemon said it also plans to expand its technical bra offering with two new high-support styles for women. Next week, the company will roll out its Selfcare line of skincare products to 50 stores and online, McDonald said.

In July, Lululemon will open its new experiential store in the Lincoln Park section of Chicago. The store will have multiple studios and a healthy juice bar. The store will provide an opportunity to “explore and learn,” and connect with guests in new ways, according to McDonald.

Net Sales: For the quarter ended May 5, revenues rose 20.4 percent to $782.3 million from $649.7 million. The company said comparable sales rose 14 percent, while comparable-store sales increased 6 percent. Direct-to-consumer net revenue rose 33 percent in the quarter, representing 26.8 percent of total net revenue in the period. The company said gross margin was 53.9 percent, or an increase of 80 basis points from the year-ago quarter.

During the quarter, the company expanded its buy online, pick-up in store capability to 150 stores, from 35 doors. Lululemon said 80 percent of online orders are ready for guest pick-up in one hour.

Earnings: Net income spiked 28.5 percent to $96.6 million, or 74 cents a diluted share, from $75.2 million, or 55 cents, in the year-ago quarter.

That was good enough to best Wall Street’s consensus estimates of diluted earnings per share of 71 cents on revenues of $755.17 million.

For the second quarter, Lululemon is guiding revenues in the range of $825 million to $835 million, based on a comparable sales gain in the low double-digits on a constant dollar basis. Diluted EPS was forecasted in the range of 86 cents to 88 cents.

For the full fiscal 2019, net revenues were guided to the range of $3.73 billion to $3.77 billion, with diluted EPS between $4.51 to $4.58.

CEO’s Take: According to McDonald, “Lululemon continues to see strong momentum across the entire business.”