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Lululemon (LULU) Up 5.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.

A month has gone by since the last earnings report for Lululemon (LULU). Shares have added about 5.8% 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 the most recent earnings report in order to get a better handle on the important catalysts.

lululemon Q4 Earnings & Sales Beat, View Robust

lululemon delivered stellar fourth-quarter fiscal 2018, with sales and earnings surpassing estimates and improving year over year. This marked its eighth consecutive earnings beat, while sales topped estimates for the 13th straight quarter.

The fiscal fourth-quarter results reflected a solid holiday season backed by positive response to merchandise assortments along with continued investments to drive business growth. Notably, in 2018, the company reached three of its targets for fiscal 2020, two years ahead of the plan. In fiscal 2018, its operating margin was 21.5%, gross margin was just over 55% and e-commerce penetration improved to 26%.

lululemon is likely to witness strong momentum across the business while executing growth strategies in the future. As a result, management provided a solid view for first-quarter and fiscal 2019.

Q4 Numbers

lululemon’s adjusted earnings of $1.85 per share outshined the Zacks Consensus Estimate of $1.74 and increased 39.1% from $1.33 registered in the year-ago quarter. The bottom lne 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 26% to $1,167.5 million and surpassed the Zacks Consensus Estimate of $1,149 million. On a constant-dollar basis, revenues increased 27%. The improvement can be attributed to strong comparable store sales (comps) performance and addition of stores. However, currency headwinds impacted revenues by $14.7 million. Notably, e-commerce contributed $344 million to sales, representing about 30% of total sales.

Total comps, including in-store comps and direct-to-consumer sales, grew 16% while constant-dollar comps were up 17%. Comps growth was driven by increase in traffic and conversion rates across stores and online. In-store comps improved 6% (or an increase of 7% in constant dollars), while DTC comps surged 37% (or an increase of 39% in constant dollars).

Margins

Gross profit rose 28% to $668.6 million in fourth-quarter fiscal 2018. Moreover, gross margin expanded 110 basis points (bps) to 57.3%. This upside can be attributed to improvement of 170 bps in product margin backed by reduced product costs, favorable product mix and lower markdowns. Occupancy and depreciation expense leverage of 20 bps also aided the gross margin. This was partly offset by increase of 50 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.

Operating income increased nearly 28% to $331.4 million, while the operating margin expanded 60 bps to 28.4%.

Store Updates

During the fiscal fourth quarter, the company opened 14 stores and completed nine co-located remodels. As of Feb 3, 2019, it operated 440 stores.

For fiscal 2019, the company targets opening nearly 40-50 company-operated stores, including 25-30 stores in international locations. It expects to open 12 stores in the fiscal first quarter.

Financials

lululemon exited fiscal 2018 with cash and cash equivalents of $881.3 million, and stockholders' equity of $1,446 million. Inventories were up nearly 22.8% to $404.8 million.

As of Feb 3, 2019, lululemon generated cash flow from operating activities of $742.8 million. Further, it spent nearly $69 million toward capital expenditure in fourth-quarter fiscal 2018, mainly related to IT and supply-chain investment, and store capital in new locations and renovations.

During the fiscal fourth quarter, the company bought back 1.5 million shares at an average price of $120.99 per share, completing the existing authorization of $600 million. In fiscal 2018, it repurchased 4.9 million shares for an average cost of $121.10 per share.

Further, the company authorized an additional share repurchase program worth up to $500 million.

Q1 Forecasts

For first-quarter fiscal 2019, lululemon anticipates revenues of $740-$750 million, with constant-dollar comps expected to increase in low-double digits. The company expects gross margin to expand marginally from 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 to scale efficiencies. Management anticipates SG&A expenses rate to be flat to up marginally, driven by consistent investments to boost the top line.

lululemon envisions earnings of 68-70 cents per share for the fiscal first quarter compared with adjusted earnings per share of 55 cents in the year-ago quarter. Effective tax rate is expected to be nearly 28%.

FY19 View

For fiscal 2019, lululemon projects revenues of $3.7-$3.74, with comps growth of low-double digits, on a constant-dollar basis. It expects modest gross margin expansion, driven by anticipated gains in product margins, and leverage on occupancy and other fixed costs. SG&A expenses are likely to leverage modestly. Earnings for the fiscal year are projected to be $4.48-$4.55 per share. 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 have trended upward during the past month.

VGM Scores

At this time, Lululemon has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise 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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