LULU Management provided perspective on its three main priorities product, branding/communication, and international although the timeline on product suggests a full recovery of sales momentum and margins are at least one to two years away. Management expects its go-to-market calendar to be fully redesigned and implemented in the next 18 months, while also implementing process solutions to improve the flow of seasonal product throughout 2015.
Management expects to begin to see a measurable impact from the aforementioned initiatives by second quarter 2015 with increasing momentum into the back half of next year, while the first quarter of 2016 should mark the ability to support global omnichannel retailing with localized assortment capability. So far in the second quarter, comps are softer than management originally anticipated, with stronger traffic trends more than offset by weaker conversion, leading the company to guide to a low- to midsingle-digit constant-dollar comp decline in the second quarter, against a 13% year-ago comparison and versus consensus expectations for flattish.
As a result of below-plan sales, management has launched incremental sales-driving initiatives, including the rollout of in-store technology providing access to lululemon s online inventory, with the app already generating 1% of retail sales and 4% of e-commerce sales. In addition, the company opened 14 pop-up shops in April across the United States and Canada, which will be open through September, to capture sales in high-demand regions without a store presence.
Second-quarter EPS guidance was set at $0.28 to $0.30, below our estimate of $0.37 and consensus of $0.36. Gross margin is expected to be in the range of 50% to 51%, versus consensus of 52.5%, on negative mix shift (more seasonal product), deleveraging on soft sales, and a weaker Canadian dollar. SG&A is expected to deleverage on strategic investments and incremental spending on sales-driving initiatives (which while driving sales have a lower flow through percentage).