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Improved Traffic to Drive lululemon's (LULU) Q3 Earnings Beat

lululemon athletica inc. LULU is likely to witness top-line and bottom-line growth when it reports third-quarter fiscal 2023 results on Dec 7, after market close.

The Zacks Consensus Estimate for fiscal third-quarter sales is pegged at $2.2 billion, indicating a 17.8% increase from the year-ago quarter's reported figure. The consensus estimate for the company's fiscal third-quarter earnings is pegged at $2.27 per share, suggesting a 13.5% rise from earnings of $2.00 per share reported in the year-ago quarter. Earnings estimates have been unchanged in the past 30 days.

The company delivered an earnings surprise of 5.9% in the last reported quarter. LULU's bottom line beat estimates by 6.8%, on average, in the trailing four quarters.

lululemon athletica inc. Price and EPS Surprise

lululemon athletica inc. Price and EPS Surprise
lululemon athletica inc. Price and EPS Surprise

lululemon athletica inc. price-eps-surprise | lululemon athletica inc. Quote

Key Factors to Note

lululemon has been benefiting from the continued business momentum, backed by a favorable response to its products. Improvement in store traffic and a solid online show bode well. The persistence of these trends is expected to have boosted the company’s top line in the to-be-reported quarter.

LULU has been capitalizing on the importance of physical retail and the convenience of online engagement, which is expected to have boosted its top-line and bottom-line performances. The company has been focused on investments to enhance the in-store experience. It has been leveraging its stores to facilitate omnichannel capabilities, including buy online pick up in store (BOPUS) and ship from store. It has also been implementing several strategies to improve the guest experience and reduce wait time. Store expansion efforts are also expected to have acted as an upside.

lululemon has been gaining from improving online demand. Its accelerated e-commerce investments to ensure a robust shopping experience bode well. The company has been investing in developing sites, building transactional omni functionality and increasing fulfillment capabilities. Some notable efforts in this space are curbside pickups, same-day deliveries and BOPUS. Gains from these initiatives are likely to be reflected in its third-quarter fiscal 2023 top-line results.

Our model predicts company-operated stores and the direct-to-consumer channel to register year-over-year revenue growth of 19.7% and 14.7%, respectively, in the fiscal third quarter. Other sales are anticipated to increase 15.4% year over year.

On the last reported quarter’s earnings call, management anticipated the strong business momentum to continue throughout fiscal 2023. LULU expects net revenues to be $2.165-$2.190 billion for third-quarter fiscal 2023, indicating 17-18% year-over-year growth. The company projects earnings per share of $2.23-$2.28 for the fiscal third quarter.

Additionally, the company has been witnessing improved gross margins in recent quarters due to lower expenses. Gross margin gains have been resulting from lower air freight expenses, which have been aiding product margin, as well as a regional mix.

We expect the adjusted gross margin to expand 160 basis points (bps) year over year to 57.5% in the fiscal third quarter, driven by a decline in the cost of sales due to lower freight expenses. For the third quarter of fiscal 2023, management expects the gross margin to expand 160-180 bps, driven by lower airfreight costs.

However, the company predicted gross margin growth to be partly offset by strategic investments to support growth, including supply chain, distribution centers, product teams and modest deleverage on occupancy and depreciation. This is likely to have resulted in an elevated SG&A expense rate in the fiscal third quarter.

Management predicted SG&A expenses, as a percentage of sales, to deleverage by 200-220 bps year over year in third-quarter fiscal 2023. The increase is likely to have been driven by its strategic decision to invest in growth initiatives, including efforts to improve global brand awareness. Operating margin is predicted to contract 40 bps year over year.

Our model predicts an adjusted operating margin of 18.6%, down 40 bps from the year-ago quarter’s actual. In dollar terms, adjusted operating income is likely to increase 14.9% year over year.

Additionally, lululemon has been witnessing elevated inventory levels, which have been concerning. Although the inventory growth rate moderated to 14% year-over-year growth in the fiscal second quarter, management expects inventory growth of high-single-digit to low-double-digits at the end of the fiscal third quarter.

What the Zacks Model Unveils

Our proven model conclusively predicts an earnings beat for lululemon this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

lululemon has an Earnings ESP of +0.19% and a Zacks Rank #3 .

Other Stocks Poised to Beat Earnings Estimates

Here are some other stocks, which according our model, have the right combination of elements to post an earnings beat:

Ollie's Bargain Outlet OLLI currently has an Earnings ESP of +0.57% and a Zacks Rank of 2. The company is anticipated to register top-line and bottom-line growth in third-quarter fiscal 2023. The Zacks Consensus Estimate for OLLI’s quarterly revenues is pegged at $470 million, suggesting growth of 12.4% from the figure reported in the prior-year quarter. You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Ollie's quarterly earnings moved up by a penny in the last seven days to 44 cents per share, suggesting 18.9% growth from the year-ago quarter's reported number. OLLI delivered an earnings surprise of 1.3%, on average, in the trailing four quarters.

Campbell Soup CPB currently has an Earnings ESP of +0.07% and a Zacks Rank of 3. The company is expected to register top-line and bottom-line declines when it reports first-quarter fiscal 2024 numbers. The Zacks Consensus Estimate for CPB’s quarterly earnings was unchanged in the last 30 days at 87 cents per share, suggesting a decline of 14.7% from the year-ago quarter's reported number.

The Zacks Consensus Estimate for Campbell Soup’s quarterly revenues is pegged at $2.5 billion, which suggests a decline of 2.7% from the figure reported in the prior-year quarter. CPB delivered an earnings surprise of 8.6%, on average, in the trailing four quarters.

AutoZone AZO currently has an Earnings ESP of +0.34% and a Zacks Rank of 3. The company is expected to register top and bottom-line growth when it reports first-quarter fiscal 2024 results. The Zacks Consensus Estimate for AZO’s quarterly revenues is pegged at $4.2 billion, which suggests growth of 4.5% from the figure reported in the prior-year quarter.

The consensus estimate for AutoZone’s bottom line has moved down 0.1% in the last 30 days to $30.78 per share, which suggests growth of 12.1% from the figure reported in the prior-year quarter. AZO has delivered an earnings surprise of 9.9%, on average, in the trailing four quarters.

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Campbell Soup Company (CPB) : Free Stock Analysis Report

AutoZone, Inc. (AZO) : Free Stock Analysis Report

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Ollie's Bargain Outlet Holdings, Inc. (OLLI) : Free Stock Analysis Report

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