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Lululemon (LULU) Up 2.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Lululemon (LULU). Shares have added about 2.5% 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 drivers.

lululemon Tops Q2 Earnings & Sales Estimates

lululemon posted second-quarter fiscal 2019 results, wherein adjusted earnings of 96 cents per share beat the Zacks Consensus Estimate of 89 cents and improved 35.2% from 71 cents in the year-ago quarter. Earnings gained from solid top-line growth along with gross margin gains and SG&A leverage.

The company’s quarterly revenues advanced about 22% to $883.4 million and surpassed the Zacks Consensus Estimate of $844.3 million. On a constant-dollar basis, revenues rose 23%, backed by strong execution across all parts of the business. The improvement can also be attributed to robust total comparable sales (comps) performance and addition of stores. However, currency headwinds impacted revenues by $8.4 million. Notably, e-commerce contributed $218 million to sales, representing about 24.6% of total sales.

Total comps, including comparable store sales and direct-to-consumer (DTC) sales, grew 15% and were up 17% in constant dollars. Comps growth was driven by rise in traffic and conversion rates across stores and online. Comparable store sales improved 10% (or an increase of 11% in constant dollars) while DTC sales grew 30% (or an increase of 31% in constant dollars).

Margins

Gross profit rose 23% to $485.8 million in second-quarter fiscal 2019. Moreover, gross margin expanded 20 basis points (bps) to 55% on a 90-bps improvement in the product margin partly offset by 20-bps deleverage of occupancy and depreciation expenses, and 30-bps increase in product and supply-chain costs. Additionally, gross margin included a negative currency impact of 20 bps. The product margin expansion was backed by reduced product costs, favorable product mix and lower markdowns, partly negated by incremental air freight costs incurred to evade the anticipated port congestions due to China tariffs. Further, higher product and supply-chain costs stemmed from the ongoing investments in supply chain and product development, including a new distribution center in Toronto.

SG&A expenses rose 21.3% to $317.8 million but declined 20 bps to 36%, as a percentage of sales. The SG&A leverage mainly resulted from a 90-bps decline in store costs and foreign exchange. Partly negated by 70 bps deleverage due to continued investments to strengthen business — including brand awareness, and initiatives to boost current and long-term growth.

Driven by gross margin growth and the SG&A leverage, operating income grew nearly 25% to $168 million while operating margin expanded 50 bps to 19%.

Financials

lululemon exited the fiscal second quarter with cash and cash equivalents of $923.7 million, and stockholders' equity of $1,507.4 million. Inventories were up nearly 26% to $494.3 million. As of Aug 4, 2019, cash from operating activities was $50 million. Further, it spent nearly $67 million toward capital expenditure in second-quarter fiscal 2019 mainly related to IT and supply-chain investments, and store capital for new locations, relocations and renovations.

During the fiscal second quarter, the company bought back 9,600 shares for $1.6 million, at an average price of $164.05 per share. As of Aug 3, 2019, it had nearly $336 million outstanding under its new $500-million share repurchase plan announced at the beginning of fiscal 2019.

Q3 Forecasts

For third-quarter fiscal 2019, lululemon anticipates revenues of $880-$890 million, with constant-dollar total comps expected to increase in the low-teens. The company expects gross margin to be flat to increase marginally in the fiscal third quarter compared with the year-ago quarter. The soft gross margin will partly reflect impacts of the newly imposed China tariffs and additional costs to airfreight products.

Providing details on the estimated impacts of tariff and related air freight charges, the company stated that it expects these headwinds to have a negative impact of 4-5 cents on fiscal 2019 earnings within gross margin. Notably, the company incurred nearly 1 cent of these costs in the fiscal second quarter and expects the remaining 3-4 cent impact to be evenly spread in the third and fourth quarters. Coming back to the fiscal third-quarter view, management anticipates SG&A expense rate to decline marginally, as it establishes a balance between investments for future growth and efficient cost management. lululemon envisions earnings of 90-92 cents per share for the fiscal third quarter compared with 71 cents recorded in the year-ago quarter. Effective tax rate is expected to be nearly 28%.

FY19 View

For fiscal 2019, the company now expects revenues of $3.8-$3.84 billion, up from $3.73-$3.77 billion mentioned earlier. It projects comps growth in the low-teens, on a constant-dollar basis. It expects modest gross margin expansion, driven by anticipated gains in product margins. Further, the company envisions modest SG&A expense leverage in fiscal 2019. Earnings for the fiscal year are projected to be $4.63-$4.70 per share, up from $4.51-$4.58 stated earlier. As previously stated, earnings per share include about 4-5 cents of additional costs within gross margin related to tariffs and airfreight. Adjusted effective tax rate is expected to be 27.5% in fiscal 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Lululemon has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Lululemon has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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