A month has gone by since the last earnings report for Lululemon (LULU). Shares have added about 4.9% 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 Beats on Q1 Earnings & Sales
lululemon delivered stellar first-quarter fiscal 2019, with sales and earnings surpassing estimates and improving year over year. This marked its ninth consecutive earnings beat while sales topped estimates for the 14th straight quarter.
Fiscal first-quarter results were backed by positive response to merchandise assortments along with continued investments to drive business growth.
lululemon is likely to witness strong momentum across the business while executing growth strategies in the future. Consequently, management provided a solid view for the second quarter and raised its fiscal 2019 guidance despite the anticipated impacts of tariff increases and airfreight costs.
lululemon posted adjusted earnings of 74 cents per share, beating the Zacks Consensus Estimate of 71 cents and up 34.5% from 55 cents in the year-ago quarter. Earnings gained from solid top-line growth along with significant improvements in gross margin, offset by higher SG&A expenses.
The company’s quarterly revenues advanced about 20% to $782.3 million and surpassed the Zacks Consensus Estimate of $757.1 million. On a constant-dollar basis, revenues increased 22%, backed by strong execution across all parts of the business. The improvement can also be attributed to robust comparable sales (comps) performance and addition of stores. However, currency headwinds impacted revenues by $12.5 million. Notably, e-commerce contributed $210 million to sales, representing about 26.8% of total sales.
Total comps, including comparable store sales and direct-to-consumer (DTC) sales, grew 14% based on shifted calendar while constant-dollar comps were up 16%. Comps growth was driven by increase in traffic and conversion rates across stores and online. Comparable store sales improved 6% (or an increase of 8% in constant dollars), while DTC sales surged 33% (or an increase of 35% in constant dollars).
Gross profit rose 22% to $421.7 million in first-quarter fiscal 2019. Moreover, gross margin expanded 80 basis points (bps) to 53.9%. This improvement can be attributed to improvement of 190 bps in product margin, backed by reduced product costs, favorable product mix and lower markdowns. This was partly offset by occupancy and depreciation expense deleverage of 20 bps, and an increase of 60 bps in product and supply chain costs due to ongoing investments in supply chain and product development. Additionally, gross margin included a negative currency impact of 30 bps.
SG&A expenses increased 21.8% to $292.9 million and 40 bps to 37.4% as a percentage of sales. The increase mainly stemmed from continued investments to strengthen business, including strategic priorities, brand awareness and initiatives to boost current and long-term growth.
Operating income increased nearly 23% to $128.8 million while operating margin expanded 40 bps to 16.5%.
During the fiscal first quarter, the company opened 15 stores. As of May 5, 2019, it operated 455 stores.
For fiscal 2019, the company targets opening nearly 40-50 company-operated stores, including 25-30 stores in international locations. Of the total store openings planned for the year, it expects about 15-20 stores in North America. Meanwhile, international openings will include about 10-15 stores in China and 5-10 stores across Europe.
Moreover, the company expects to open five stores in the fiscal second quarter.
lululemon exited the fiscal first quarter with cash and cash equivalents of $576.2 million, and stockholders' equity of $1,366.7 million. Inventories were up nearly 18.6% to $443 million.
As of May 5, 2019, lululemon used cash flows of $62.8 million in operating activities. Further, it spent nearly $68 million toward capital expenditure in first-quarter fiscal 2019 mainly related to IT and supply-chain investment, and store capital in new locations and renovations.
During the fiscal first quarter, the company bought back 1 million shares at an average price of $163.5 per share. At the beginning of fiscal 2019, it authorized a new $500-million share repurchase plan, of which nearly $337 million of authorization remains outstanding.
For second-quarter fiscal 2019, lululemon anticipates revenues of $825-$835 million, with constant-dollar comps expected to increase in a low-double digit.
The company expects gross margin to be flat to increase marginally in the fiscal second quarter compared with the year-ago quarter. The soft gross margin will partly reflect impacts of potential tariffs and additional costs to airfreight products to avoid the anticipated congestion at ports in Asia, owing to pending tariff increases. These costs are likely to impact gross margin by about 20-25 bps and earnings per share by 4-5 cents in fiscal 2019. Majority of these impacts are likely to be recorded in the second half of fiscal 2019, with most of it likely to be incurred in the fiscal third quarter.
Further, the company stated that it expects about 2-3 cents impact on earnings per share even if the new tariffs are not imposed. It also remains committed to increased use of airfreight to hedge against the disruption in ocean shipping lanes as the key dates for tariff increases are nearing. This is expected to ensure timely delivery of new products to guests.
Management anticipates SG&A expense rate to be flat, driven by persistent investments to boost the top line.
lululemon envisions earnings of 86-88 cents per share for the fiscal second quarter compared with 74 cents recorded in the year-ago quarter. Effective tax rate is expected to be nearly 28%.
For fiscal 2019, lululemon now expects revenues of $3.73-$3.77 billion, up from $3.7-$3.74 billion expected earlier. The company continues to project comps growth in a low-double digit, on a constant-dollar basis. It expects modest gross margin expansion, driven by anticipated gains in product margins, offset by the aforementioned impacts of potential tariff increases and use of airfreight. The company envisions increased opportunities to leverage SG&A expenses in the back half of the fiscal year, projecting modest SG&A expense leverage in fiscal 2019.
Earnings for the fiscal year are projected to be $4.51-$4.58 per share, up from the prior view of $4.48-$4.55. 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 28% in fiscal 2019.
Capital expenditure for fiscal 2019 is estimated to be $265-$275 million. Capital spending will be directed to the ramp-up of store renovation and relocation programs, store openings, and investments in technology and other general infrastructure projects.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
Currently, Lululemon has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
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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