Lululemon Online and China Growth Boost Earnings, Guidance

Lululemon, best known for it’s yoga gear reported better than expected earnings Tuesday. $LULU produced, demonstrating innovation and momentum across the business is accelerating, and the athleisure industry in international and online sales in China.

Lululemon, best known for it’s yoga gear reports after the market Tuesday. $LULU like Nike $NKE is expected to report boosts in international and online sales, with men and in China.

Lululemon Pose

$LULU has successfully crafted out a niche for itself as a North American sports apparel brand in a very crowded marketplace, Nike remains the dominant player in the athletic apparel space with Adidas popular with teens and millennials.

LULU Beats Earnings Consensus Forecast

$LULU  reported adjusted 4Q17 EPS of $1.33. Results exclude $0.44 related to Tax Reform and $0.01 related to ivivva. Total revenue increased 17.6% y/y to $928.8 mm, beating expectations of EPS of  $1.27 with a 15% revenue increase to $910 million. RBC Capital Markets in January issued a note seeing Lululemon on target for its $4 billion sales target for 2020. 

Market Reaction

> Lululemon Athletica inc. NASDAQ: $LULU

Mar 28, 2018 Pre-market: 84.15 +5.44 (+6.91%)

Highlights

  • Accelerating positive physical traffic
  • Total comps increased 11% on a constant dollar basis, driven by a 1% physical store comp and 42% growth in DTC.
  • 20%+ ecommerce growth riven by the recent website redesign; since the re-launch, there has been a 20% increase in site traffic, 19% increase in conversion, a 19% increase in direct visits, and a 32% increase in e-mail business.
  • 40%+ current run-rate
  • From a merchandise perspective, women’s tops were up 8%, and women’s pants were up 19%. Men’s comped +DD, driven by a 21% comp in men’s bottoms, and a 10% comp in men’s outerwear.
  • Adjusted operating margin increased 290 basis points to 27.8%:
  • Gross margin increased 200 bps to 56.2% driven primarily by a 130 bps benefit in product margin from favorability and product mix, lower product costs and lower markdowns.
  • The operating expense rate decreased 90 bps to 28.5%, driven by 60 bps of more efficient spend, and fx translation and revaluation exposures contributed 30 bps of leverage

Barclays Issues Note, Upgrading LULU

We are decreasing our FY18 EPS estimate to $3.10 from $3.20, and establishing our FY19 EPS estimate of $3.70. We are increasing our price target to $100 from $95. Total revenue increased 17.6% y/y to $928.8 mm (vs. our $914.7 mm estimate). LULU noted success in its co-located projects, and plans to accelerate the program with 20 to 25 stores in the format in 2018. 

 

Note: This Story Was Updated After The Earnings Report

Earnings Preview

Lululemon Growth Strategy

Valuing $LULU going forward is to do with the success of it’s three lergest growth opportunities are in the online e-commerce, men’s, and international sales categories.

International Markets

With the saturated North American market we see this as the one with the most potential. The obvious target is China, with its growing middle class and the fact there are more than 400 million millennials (now that is a huge number). Further to that China’s government along with it’s clean air policy has a plan encouraging healthier lifestyles through 2030.

Lululemon already has success in China with almost triple-digit growth rates with its stores in the large Chinese cities. The company plans forecasts that online sales will reach 40% to 50% of Lululemon’s sales in China. 

Online and Direct to Consumer marketing 

In Q3 online sales and made up 21.2% of total revenue in the third quarter with growth between 26% to 29% over the past two quarters. The company has incorporated its bricks to mortar stores within it’s online strategy where appropriate. $LULU customers can pick up online orders in-store and ship from the store. There are high expectations here after strong one for Lululemon’s direct to consumer segmentsaw n record traffic and online sales reported for Black Friday.

Men’s Apparel Segment

The company has focused and is best known for it’s women’s lines, for the past few years there has been growing emphasis on the men’s offerings. There is success here with the men’s ABC pants sales doubling in the third quarter over the year-ago quarter. Men’s pants iare seen as the gateway product to the brand for men. Lululemon has been gradually expanding the men’s lines with success on other central lines like Metal Vent Tech tops with its first-ever marketing campaign targeted at men. In Q3 $LULU reported a 21% increase in new male guests who purchased an item. 

It appears this space is a magnet for controversy. We have had the recent Nike resignations and Lululemon’s CEO Laurent Potdevin also resigned with scandal. What is interesting neither $NKE or $LULU investors appeared roiled by the news. Perhaps the two stocks have grown to the point investors believe in the brand and strategy. Meanwhile former Gap $GPS boss Glenn Murphy is running $LULU until a replacement is found.

Lululemon Athletica Inc NASDAQ: LULU Closed March 23,2018 at $79.51 ▼ 1.59 (1.96%). The stock price has a range of $83.98 to 47.26 for the past 52 weeks.

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