Shares of the Vancouver-based yoga-inspired athletic apparel company Lululemon Athletica Inc. (LULU, Financial) rallied 10% pre-market and 15% in the early trading hours of trading on Friday, following another impressive quarterly result released after hours.
The company’s second-quarter results beat analyst estimates on both revenue and earnings. Lululemon reported earnings per share of 71 cents, beating Street estimates by 22 cents per share on revenues of $723.5 million, which trounced the consensus estimate by $54.5 million.
Lululemon’s impressive top line was driven by a massive growth in comparable sales, which soared 20% in the company’s fiscal second quarter.
This also helped push the company’s margins higher, with the gross margin averaging in the mid-50s level while the trailing 12-month Ebit neared 21%, according to the company chief operating officer, Stuart Haselden.
Lululemon management said it expects gross margin "for the year to expand 100 to 150 basis points in 2018, primarily driven by the continued product margin improvement and leverage on occupancy and other fixed costs.” This is despite the investments the company expects to make in the third quarter to fuel future growth.
“We are still expecting SG&A for the full year to leverage modestly as we continue to realize efficiencies within our cost structure while leveraging investments in technology, brand building, and people,” Chief Financial Officer PJ Guido told investors during the second-quarter earnings conference call.
Lululemon’s revenues have maintained steady growth over the last six years, and this is expected to continue through fiscal 2019 and 2020 according to analyst estimates. The company’s earnings per share is expected to post a significant rebound following fiscal 2018’s slowdown as management remains upbeat going into the second half of the year.
During the earnings conference call, management issued strong guidance on both revenue and earnings, with the top line expected to top $3.1 billion. Lululemon forecasts revenue of $3.185 billion to $3.235 billion in fiscal year 2019. In the first quarter, the company was expecting annual revenues of $3.04 billion to $3.075 billion.
Earnings per share is projected to come in at about $3.45 to $3.53 compared to a consensus analyst estimate of $3.23. Initial guidance on earnings per share was $3.10 per share to $3.18.
This clearly shows the expected impact of the company’s improving margins even as it continues its global expansion and investment in technology and innovation.
Lululemon’s growth strategy is centered on digital investments and global growth. From a digital perspective, the company is investing in new CRM strategies and data analytics to help leverage personalization when engaging with customers. Management expects this strategy to boost traffic to its websites and stores. Haselden told investors that the company is already expecting to hit the $4 billion revenue goal with men and e-commerce business segments ahead of schedule.
In the most recent quarter, traffic to the company’s e-commerce site grew 20% and as it continues to leverage new technologies, quicker growth will be expected in the coming quarters.
The company’s global growth is also gaining momentum, with Asia expected to begin netting profits this year. The company’s total comparable sales in Asia increased by 50%. China led the way with comparable e-commerce sales up 200%. Lululemon launched a WeChat store in China in the second quarter and remains on track to launch e-commerce sites in Korea and Japan later this year.
The company also experienced better-than-expected growth in Europe and continued its growth in the continent by opening another store in Stockholm, Sweden, a key destination for its expansion to the Scandinavian region.
From a valuation perspective, shares of Lululemon appear expensive compared to those of sporting apparel rivals Nike Inc. (NKE, Financial) and Adidas AG (OTCPK:ADDYY, Financial). Lululemon currently trades at a price-earnings ratio of about 70, which compares weakly to Nike’s ratio of about 31 and Adidas’ multiple of 29.
But this steep valuation could be credited to the company’s potential for growth, especially given its global expansion and recent investments in technology and innovation. The company’s PEG ratio of about 2.50 is in line with that of giant Nike’s 2.51. This compares positively to the valuation multiple of another sporting giant, Under Armour Inc. (UA, Financial), which currently trades at a five-year expected PEG ratio of about 20.
In summary, Lululemon’s growth plan appears to be gaining momentum with significant milestones in key markets already reached. Its investment in technology also appears to be paying off, and the company’s management continues to maintain an upbeat mood going into the final two quarters of this fiscal year.
Disclosure: I have no positions in the stocks mentioned in the article.
