Lululemon (LULU) Up 18.6% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Lululemon (LULU). Shares have added about 18.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lululemon due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

lululemon Q2 Earnings Beat, Raises FY18 View

lululemon athletica inc. delivered solid second-quarter fiscal 2018, with both sales and earnings surpassing estimates and improving year over year. This marked its sixth consecutive earnings beat. The company’s sales topped estimates for the 11th straight quarter.

The strong fiscal second-quarter results reflected broad-based growth across all categories, channels and geographies. Further, the company witnessed significant comparable store sales (comps) growth, which demonstrates the success of its strategy to acquire guests. Notably, guest acquisition increased 30% in the fiscal second quarter, significantly driving traffic growth across channels.

lululemon is likely to witness strong momentum across its business while executing growth strategies in the future. Further, the company notes that the momentum from the first and second quarters of fiscal 2018 is continuing to the fiscal third quarter. Consequently, management provided a solid view for the fiscal third quarter and raised its guidance for fiscal 2018. Driven by these, the company remains on track to deliver revenues of $4 billion for fiscal 2020.

Q2 Numbers

lululemon posted earnings of 71 cents per share, substantially beating the Zacks Consensus Estimate of 49 cents and rising 82.1% from adjusted earnings per share of 39 cents in the year-ago quarter. Earnings gained from solid top-line growth along with significant improvements in gross margin and SG&A expenses.

The company’s quarterly revenues advanced about 25% to $723.5 million and comfortably surpassed the Zacks Consensus Estimate of $669 million. On a constant-dollar basis, revenues increased 24%. The improvement can be attributed to the strong performance across all parts of the business.

Total comparable store sales (comps), including in-store comps and direct-to-consumer sales, grew 20% while constant-dollar comps were up 19%. In-store comps improved 10%, both on a reported basis and in constant dollars, while DTC comps surged 48% (an increase of 47% in constant dollars). In the fiscal second quarter, the company held an online warehouse sale, excluding which DTC comps improved by a whopping 66% (up 65% in constant dollars).

Margins

Gross profit rose 32% to $396.2 million in second-quarter fiscal 2018. Moreover, gross margin expanded 320 basis points (bps) to 54.8%, substantially higher than the company’s guidance. This improvement can be attributed to the company’s product assortments and supply chain initiatives, which are delivering above expectations. The gross margin was fueled by 260 bps improvement in product margins, backed by reduced product costs, favorable product mix and lower markdowns.

Further, the reported quarter was marked by a 20 bps gain from foreign currency, and 70 bps leverage on occupancy and depreciation, offset by 30 bps increase in product and supply chain SG&A expenses.

Operating income increased nearly 81% to $134.2 million while the operating margin expanded 570 bps to 18.5%.

Store Updates

During the fiscal second quarter, the company opened five stores and closed one. As of Jul 29, 2018, the company operated 415 stores.

For fiscal 2018, it targets opening nearly 40 company-operated stores, including 20-25 stores in international locations. The company expects to open 10 stores in the fiscal third quarter.

Financials

lululemon exited the fiscal second quarter with cash and cash equivalents of $777.8 million and stockholders' equity of $1,320.2 million. Inventories were up 24.1% at $392.7 million.

As of Jul 29, 2018, lululemon generated $210 million as cash flow from operating activities. Further, it spent nearly $50 million toward capital expenditure in second-quarter fiscal 2018, mainly related to IT investment and supply chain, data and analytics, and further enhancement of e-commerce platform, alongside the addition to stores and store renovations.

Q3 Forecasts

For third-quarter fiscal 2018, lululemon anticipates revenues of $720-$730 million, with constant-dollar comps expected to increase in the low-teens range. The company projects gross margin to improve 100 bps compared with the year-ago quarter. This is likely to be driven by higher product margins, alongside an incremental reduction in average unit costs, backed by ongoing supply-chain initiatives scale efficiencies. Management anticipates SG&A expenses to deleverage by about 100 bps.

lululemon envisions earnings of 65-67 cents per share for the fiscal third quarter. Effective tax rate is expected to be nearly 30%.

FY18 View

Following the strong results and the ongoing momentum in its business, lululemon raised its outlook for fiscal 2018. The company now projects revenues of $3.185-$3.235 billion compared with $3.04-$3.075 billion projected earlier. The guidance is based on comps growth of low-teens on a constant-dollar basis versus the prior forecast of high-single-digit comps growth. Notably, sales and earnings for fiscal 2018 will include a modest benefit from the 53rd week.

The company expects gross margin expansion for fiscal 2018 to expand 100-150 bps, driven by anticipated gains in product margins, and leverage on occupancy and other fixed costs. It continues to anticipate SG&A expenses to leverage modestly, due to efficiencies within its cost structure.

Earnings for the fiscal are now projected to be $3.45-$3.53 per share compared with the previous guidance of 3.10-$3.18. The effective tax rate is expected to be 30% in fiscal 2018, slightly higher than the prior forecast of 29%. Tax gains result from the refinements under the new tax reform.

Capital expenditure for fiscal 2018 is estimated to be $240-$250 million, including the ramp-up of renovation and relocation programs, increased store opening in international markets, and investments in general infrastructure projects.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 7.56% due to these changes.

VGM Scores

Currently, Lululemon has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Lululemon has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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