Yahoo Finance Here's Why lululemon (LULU) is Marching Ahead of Its Industry
lululemon athletica LULU has been gaining from continued business momentum, as well as robust traffic trends in stores and e-commerce. The company’s Power of Three ×2 growth strategy bodes well.
The above-mentioned factors led to strong fourth-quarter fiscal 2022 results, with revenues and earnings surpassing the Zacks Consensus Estimate and our estimates. Earnings beat estimates for the 11th straight quarter in fourth-quarter fiscal 2022. Its sales surpassed the Zacks Consensus Estimate for the fourth straight quarter. The top and bottom lines improved year over year.
lululemon’s fiscal fourth-quarter earnings increased 30.6% from the year-ago quarter. The company’s adjusted earnings improved 25% on a three-year CAGR basis. Revenues advanced 30% year over year, driven by the strong momentum in its business, backed by a favorable response to its products. On a constant-dollar basis, revenues improved 33%. On a three-year CAGR basis, net revenues increased 26%.
The company’s net revenues grew 29% in North America and 35% internationally. On a three-year CAGR basis, revenues improved 24% in North America and 39% internationally. lululemon’s total comparable sales rose 27% year over year and 30% on a constant-dollar basis.
Consequently, shares of this Zacks Rank #3 (Hold) company have gained 15.9% in the past three months against the industry’s decline of 2.6%.
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That said, let’s delve deeper into the other factors aiding LULU.
Key Growth Drivers
lululemon witnessed a rebound in brick-and-mortar sales, driven by increased store traffic as consumers returned to stores for shopping. In the company’s store channel, sales increased 26% year over year and 10% on a three-year CAGR basis. At stores, comparable store sales increased 15% and 17% on a constant-dollar basis.
The company witnessed more than 30% traffic growth at stores. On a three-year CAGR basis, traffic was up 7% in stores. Management highlighted that store productivity in the fourth quarter of fiscal 2022 continued to trend above the 2019 level. The company has been focused on investments to enhance the in-store experience. It has been leveraging its stores to facilitate omni-channel capabilities, including buy online pick up in store (BOPUS) and ship from store.
LULU has implemented several strategies to improve the guest experience and reduce wait time. These include virtual waitlist, mobile POS and appointment shopping. These functionalities enable reducing the time of waiting in line to enter the store, as well as allow customers to complete some transactions like returns, exchanges and purchase of gift cards without entering the store.
lululemon expects to capture the growing online demand and ensure a robust shopping experience through its accelerated e-commerce investments. Increased focus on developing sites, building transactional omni functionality and increasing fulfillment capabilities bode well. The company has been strengthening omni-channel capabilities, such as curbside pickups, same-day deliveries and BOPUS. It is enhancing its mobile app in a bid to offer the curbside pickup service and train its store associates to speed up transactions. Free online digital educator service for people that cannot make it into the company’s stores bodes well.
In the fourth quarter of fiscal 2022, direct-to-consumer net revenues climbed 37% (up 39% on a constant-dollar basis). In the digital channel, revenues accounted for 52% of the company’s net revenues compared with 49% in the fourth quarter of fiscal 2021. E-commerce traffic improved more than 45% in the fiscal fourth quarter and 40% on a three-year CAGR basis.
Digital revenues amounted to $1.4 billion in the fiscal fourth quarter. The company’s e-commerce business delivered an impressive performance, with revenues increasing 46% on a three-year CAGR basis. Digital comps increased 39% on a constant-dollar basis.
lululemon has been on track with its Power of Three ×2 growth strategy. The move is likely to double its revenues from $6.25 billion in 2021 to $12.5 billion by 2026. The plan focuses on three key growth drivers —product innovation, guest experience and market expansion. The five-year plan is likely to quadruple international sales, along with doubling digital and menswear sales. Also, the women’s business and North America operations are each anticipated to witness a low-double-digit CAGR in revenues, with store channel growth in the mid-teens in the next five years. As part of its strategy, the company intends to expand in China and Europe markets, with plans to open stores in Spain and Italy.
For 2021-2026, the total net revenue CAGR is expected to be 15%, with a slight expansion in the operating margin on an annual basis. lululemon anticipates bottom-line growth to outpace revenue growth. Although the 2026 targets seem too bold, the company believes that these are achievable due to its strong financial position.
Hurdles
lululemon has been grappling with elevated costs, hurting the gross margin. The gross margin contracted 300 basis points (bps) to 55.1% in fourth-quarter fiscal 2022. The adjusted gross profit increased 28.7% to $1,590.5 million, while the gross margin declined 70 bps to 57.4%. The decline in the gross margin can be attributed to a 50-bps deleverage from foreign currency, offset by a 30-bps decline in the product margin.
Income from operations declined 47% year over year to $314.4 million. The operating margin fell significantly to 11.3% from the prior-year quarter’s 27.7%. The adjusted income from operations rose 33% year over year in the fourth quarter of fiscal 2022 to $785.3 million. The adjusted operating margin contracted 50 bps to 28.3%.
It continues to witness higher SG&A costs. In fourth-quarter fiscal 2022, the company’s SG&A expenses of $803.1 million increased 25.1% from the year-ago quarter due to higher corporate SG&A, and a slight increase in depreciation and amortization. For the first quarter of fiscal 2023, management anticipates a 60-80 bps deleverage in the SG&A expense rate for the fiscal first quarter, driven by higher investments. For fiscal 2023, LULU expects the SG&A rate to deleverage 120-140 bps year over year.
The deleverage is likely to be driven by increased investments to support market expansion, improve the guest experience by enhancing omni-channel capabilities and making foundational investments to support growth. The company anticipates higher depreciation for fiscal 2023 due to ongoing and prior investments.
lululemon's elevated inventory levels at the end of the quarter hurt investors’ sentiment. The company’s inventory grew 49.8% to $1,447.4 million at the end of fiscal 2022. This included a $62.9-million provision against inventory related to lululemon Studio, which reduced the inventory growth rate by seven percentage points. The company noted that the off-season accounted for about 45% of its inventory.
For fiscal 2023, management expects moderate inventory growth, while maintaining its full-price selling model and remaining well-positioned to fulfill guest demand. lululemon expects the inventory growth rate at the end of the fiscal first quarter to increase 30-35% from that reported in the last year. The company expects inventory growth to be in line with sales growth in the second quarter of fiscal 2023.
Conclusion
We believe that robust sales, led by solid online and store traffic, will help offset cost headwinds. Encouragingly, management expects the strong business momentum to continue in fiscal 2023. We estimate the company’s net revenues for the current fiscal year to reflect growth of 15.9% to $9,396.7 million. This is in sync with the company’s guidance of $9.300-$9.410 billion, indicating year-over-year growth of 15-16%. lululemon’s revenue view represents slightly better sales than its target under the Power of Three x2 growth plan. GAAP EPS is projected to be $11.50-$11.72 for fiscal 2023.
lululemon anticipates a gross margin increase of 140-160 bps for fiscal 2023 due to lower air freight expenses. For the fiscal year, the company expects air freight to decline 150 bps year over year. However, the company expects fiscal 2023 markdowns to be in line with those reported in the last year and fiscal 2019. The company expects the operating margin for fiscal 2023 to increase 20-40 bps from that recorded in the last year. The increase is expected to be slightly higher than the Power of Three x2 long-term target of a modest expansion annually.
For the first quarter of fiscal 2023, management anticipates net revenues of $1,890-$1.930 billion, indicating 17-20% year-over-year growth. The company projects EPS of $1.93-$2 for the fiscal first quarter. The fiscal first-quarter gross margin is likely to expand 290-320 bps year over year. The gross margin is expected to benefit from lower air freight expenses, offset by currency headwinds and strategic investments in the supply chain and distribution centers. lululemon expects the operating margin to increase 200 bps in the fiscal first quarter.
Topping it, earnings estimates for the current financial year have grown 1% to $11.43 in the past 30 days. Also, a VGM Score of B and a long-term earnings growth rate of 20% reflect its inherent strength.
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H&R Block provides assisted income tax return preparation and do-it-yourself tax return preparation services. HRB currently carries a Zacks Rank #2.
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