Lululemon Sales Grow, While Ivivva Restructuring Eats Into Profits

Even with more restructuring costs on the horizon, the company upped its guidance.

Lululemon Athletica Inc. posted another quarter of double-digit sales growth, but the restructuring of its girls line Ivivva took a big bite out of its profits.

The yoga-centric brand said net revenue for the quarter ended Oct. 29 came in at $619 million, a 14 percent increase from a year ago, while income from operations fell 8 percent to $85.6 million. Comparable-store sales rose by 2 percent and direct-to-consumer, or online, sales grew by 26 percent.

Lululemon’s decision earlier this year to close nearly all of its Ivivva brand stores and refocus it online cost the company $22.2 million during the quarter. Costs related to the restructuring are expected to total around $50 million this year, stemming mainly from lease terminations.

Shares of the company popped 6.4 percent during after-hours trading, rising to $72, a high for the year.

Chief executive officer Laurent Potdevin said the company is seeing “strong momentum” in its digital business, with a new web site launched toward the end of the quarter, but also in retail, where stores are designed and operated to create a sense of community, offering things like in-store yoga.

“The retail landscape is experiencing unprecedented disruption, characterized by increasingly commoditized transactions and short-term focus,” Potdevin said during a call with financial analysts. “But disruption also creates tremendous opportunity, and Lululemon is at the forefront of unlocking the future of what defines a new era of human connection and a powerful evolution of retail.”

The ceo added that the holiday season is off to a good start, with Black Friday and Cyber Monday being some of Lululemon’s best days ever for sales and traffic, and said the company is opening 22 “seasonal stores” in various locales so Lululemon can meet shoppers “where they are.”

It’s also expanding rapidly in permanent retail, with 26 U.S. stores added since this time last year, along with four in Canada, three in Europe, three between Australia and New Zealand, and 10 in China, where the company is poised to expand even further.

Potdevin noted that China alone has 450 million Millennials and a culture that’s increasingly interested in an active lifestyle and that Lululemon is just becoming known there.

“It’s hard to say when it will mature there,” Potdevin said. “It was very exciting to land in Shanghai, as I did recently, and see our product on the cover of Harper’s Bazaar. That’s something that has not happened in North America.”

International is also expected to make up a big portion of Lululemon’s goal of $4 billion in revenue by 2020. Potdevin gave a rough breakdown of what the business will look like when that time comes, with $1 billion in revenue each expected for digital, international, men’s and its core women’s product.

Stuart Haselden, Lululemon’s chief operating and financial officer even mentioned that retail trends in North America have been looking up recently, with improved traffic in the first weeks of the fourth quarter. Emanuel Chirico of PVH Corp. sounded a similar note on North America recently.

With most things looking to go its way, Lululemon increased its guidance for the fourth quarter and the full year. Revenue is expected to be in the range of $870 million to $885 million for the fourth quarter, based on a total comp-sale increase in the midsingle digits. For the full year, revenue is expected to total around $2.6 billion, with total comp sales again growing by midsingle digits. Diluted earnings per share are expected to be in the range of $2.20 to $2.23.

But the company odes have some changes coming, and Potdevin made a passing mention to an impending hire related to women’s design that will be “really powerful.”

As for the upcoming departure of creative director Lee Holdman, who’s exit from the company was revealed last month, with Lululemon citing “personal reasons,” Potdevin confirmed for the first time that the position will be filled. He also said the departure does not signal any change in strategy on the design or merchandising side.

“I feel like we’re in really, really strong shape…and obviously, 2018 is very much planned already,” Potdevin said. “So, we’re going to look for a creative director, but we’re in no rush. It’s a very, very important role. It’s not an easy role to fill.”