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Lululemon strong in Q3; upbeat about holiday

BY Marianne Wilson

Some other players in the sports and athleisure market may be having a rough time of it these days, but Lululemon Athletica Inc. is not one of them.

The maker of yoga wear and other specialty apparel raised its forecast for the year after easily topping analysts’ estimates for the third quarter, fueled by strong digital growth. Lululemon’s net revenue increased 14% to $619.0 million in the quarter ended Oct. 29.

Total same-store sales increased 8%, Comp sales surged 26% in the direct channel and 2% in stores.

The company reported net income of $59 million and earnings per share of $0.43 for the quarter, down from $68 million a year earlier. Excluding the impact of the Ivivva restructuring (the company announced in June it was closing most of its Ivivva kids stores), adjusted earnings per share would have come in at $0.56. Analysts had expected adjusted earnings of 52 cents a share on sales of $610 million, with a comp rise of 5.3%.

Kevin Wathey, a consultant at GlobalData Retail, commented that the strength of Lululemon’s bottom line is mostly due to its ability to resist the temptation of excessive discounting — even in a market that has become steadily more promotional.

“In our view, this is made possible by the fact that Lululemon, unlike so many of its rivals, has a line-up of products that people want and for which they are prepared to pay full price,” he said. “Constant innovation and a laser-like focus on functionality and quality are central to this. Complementing the product proposition are Lululemon’s efforts to foster loyalty. The company has long understood the power of creating a sense of community, and we are encouraged to see it extending its efforts in this area.”

Lululemon said that its holiday season was off to a great start, with the company experiencing its highest traffic and largest sales ever on Black Friday and on Cyber Monday. It raised its forecasts for its profit and revenue for its fiscal year. It now expects adjusted earnings of $2.45 to $2.48 a share, up from a prior forecast of $2.35 to $2.42 a share. Revenue is expected in a range between $2.59 billion and $2.61 billion, up from $2.55 billion to $2.56 billion.

The strength of our Q3 earnings supports our unique position as the global brand defining an active, mindful lifestyle,” said Laurent Potdevin, Lululemon CEO. “I’m grateful for the enthusiasm I see every day across our collective as we remain on our path to delivering $4 billion in revenue in 2020.”

Lululemon also announced that its board of directors has approved a new stock repurchase program for up to $200 million.

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Dollar General to open 900 stores, accelerate remodels in 2018

BY Marianne Wilson

Dollar General on Thursday reported results for the third quarter that beat Street estimates and announced aggressive remodeling plans and new store growth for the coming year.

The discounter will execute approximately 2,000 real estate projects in fiscal 2018. The emphasis will be on remodeling. Dollar General plans to open 900 new stores (compared to an estimated 1,285 new units in fiscal 2017), remodel 1,000 existing sites and relocate 100 stores (compared to 760 combined remodels and relocations this year).

“We continue to believe that investing in the business through our high-return new store growth is the best use of our capital to help drive long-term shareholder value,” said Todd Vasos, Dollar General’s CEO. “Our new store growth is complemented with a significant increase in our store remodel program from fiscal 2017 that we view as an investment to enhance and consistently deliver on our brand promise to help our customers save time and money every day.”

Neil Saunders, managing director of GlobalData Retail, commented that many of Dollar General’s new stores will be located in metro areas.

“This represents a slight shift in focus–but one that we believe presents Dollar General with a significant opportunity,” Saunders said. (For more, click here.)

Dollar General’s net income rose to $252.5 million, or 93 cents per share, from $235.3 million, or 84 cents per share, in the quarter ended November 3, over the year-ago period. Excluding items, the company earned 98 cents per share, beating the average analysts’ estimate of 94 cents.

Net sales increased 11% to $5.90 billion. Same-store sales rose 4.3%, which the company attributed to increases in average transaction amount and customer traffic. The company said hurricane-related sales contributed an estimated 30 to 35 basis points to same-store sales.

“During the quarter, we effectively balanced our same-store sales growth while achieving gross profit rate expansion and continuing our planned investments in the business,” said Vasos.

Dollar General narrowed its fiscal 2017 GAAP diluted earnings per share to $4.37 to $4.47, compared to its prior guidance range of $4.35 to $4.50. The current diluted earnings per share guidance range now includes the estimated net negative impact on the third quarter diluted earnings per share results of $0.05 related to the hurricanes.

For fiscal 2017, the company now forecasts net sales growth of approximately 7%, compared to its prior guidance range of 5% to 7% growth. It also forecasts same-store sales growth of approximately 2.5%, compared to its prior expectation that same-store sales would fall at the upper end of the range of slightly positive to up 2%.

Dollar General operated 14,321 stores in 44 states as of November 3, 2017.

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Analysis: Dollar General remains one of the success stories of U.S. retailing

After a soft start to the year, Dollar General is finally back on track with much stronger sales numbers. The 11% rise in net revenue is impressive and reflects both ongoing fleet expansion and various initiatives to improve the productivity of existing shops. The 4.3% increase in comparable sales is evidence that the store based programs are working.

Although Dollar General trades primarily on price, it has another, often overlooked advantage: convenience. With well over 14,000 stores across the U.S., almost 75% of the population now live within 5 miles of a Dollar General store. This makes the company the closest and most convenient general merchant for millions, especially those living in rural areas.

Dollar General’s forward opportunity is to capitalize on this convenience by persuading more shoppers, and especially those outside of its core target market, to visit stores. This has been one of the focal points of the various store initiatives, and we are encouraged by the early progress, with our data showing the company is capturing a more significant share of spending from middle income and more affluent Americans.

Optimizing the product assortment, including bringing in more branded products, has allowed Dollar General to shift quality perceptions — especially among non-traditional shoppers. The move has also helped Dollar General increase average transaction values. Meanwhile, the introduction of fresh in a handful of remodeled stores appears to be working well, improving both customer traffic and spending. In our view, rolling fresh out across the bulk of the estate would give Dollar General more of a destination status — although executing this in some of the smaller stores may prove challenging.

Dollar General has also been developing product categories where it feels it is underperforming in terms of market share. One of these areas is beauty, and as our data show this is indeed an area of relative weakness for the chain. To capitalize on this latent opportunity, Dollar General has redesigned the cosmetics area in many stores to showcase on-trend products better. Improvements have also been made to health and wellbeing ranges. Early indications suggest that these changes are working well and are driving up market share.

The focus on improving the existing fleet has not come at the expense of store expansion. Indeed, Dollar General has already signaled that it expects to execute over 2,000 real estate projects in 2018 resulting in the opening of at least 900 additional stores. Many of these will be in metro areas, which represents a slight shift in focus — but one that we believe presents Dollar General with a significant opportunity.

The frantic activity does come with costs attached. However, these are not too much of a concern as Dollar General makes fast returns on both its new stores and its improvement and remodeling programs. Underlying cost increases, including higher salaries, are a little more worrying and continue to act as a drag on margins and profit growth. However, we maintain that it was right for Dollar General to invest more in staff. We are encouraged that it will attempt to find efficiencies elsewhere to offset the costs.

Looking ahead, we expect Dollar General to feel the continued heat of cost increases in the next couple of quarters. However, a much firmer sales trajectory will help alleviate some of this pressure. Overall, Dollar General remains one of the success stories of U.S. retailing.

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