What to Watch When Lululemon Athletica Reports Earnings

Markets Motley Fool

lululemon athletica (NASDAQ: LULU) is scheduled to report its second quarter earnings after the market close on Thursday, Aug. 31.

Continue Reading Below

The past year has been tough for the retail market, with many retailers struggling to stay alive. Top athletic apparel brands, including Nike, Under Armour, and Lululemon, have been unable to buck the negative trend sweeping the broader retail industry.

Still, there were positive developments for Lululemon in the first quarter that could carry through in the second, and help the yoga specialist recover its lost shape.

Key numbers to watch

Metric Fiscal Q2 2016 Fiscal Q2 2017 Guidance
Revenue $514.5 million $565 million to $570 million
Gross margin 49.4% *50.4%
Adjusted earnings per share $0.38 $0.33 to $0.35

Gross margin is expected to improve, but as you can see, earnings per share (EPS) is anticipated to be down year over year. This is due to investments the company is making in a new brand advertising campaign, as well as higher operating costs associated with revamping its digital (e-commerce) channel.

Continue Reading Below

Investors may want to keep in mind what Wall Street analysts are anticipating because stock prices often react more to whether the company beats or falls short of analysts expectations. Analysts expect the company to report EPS at the high end of guidance, or $0.35, and to report revenue of $567.33 million. But, here are some key trends to watch when the company reports:

New products

Lululemon has found success this year with new products in key categories such as women's sports bras and men's apparel. The new Enlite sports bra has been a runaway hit. The bra category has been an area of weakness for Lululemon, but management believes Enlite has now positioned Lululemon's bra offering on a level plane with its women's bottoms.

In menswear, which is about 20% of total revenue, key product launches during the second quarter, such as Metal Vent Tech and Pack-and-Dash run tops, is expected to drive strong sales in the category. Total comparable store sales performance across the men's category was in the high-single digits in the first quarter. More significant was comparable sales in men's bottoms -- often the entry product to the brand for men -- which was up 20% in the first quarter.

Men's top sales accelerated as the first quarter progressed driven by new products, so, with more new styles, investors should expect to hear more good news out of men's for the second quarter.

Digital business

Lululemon's digital channel performance decelerated from 17% in the 2016 first quarter to flat in the 2017 first quarter. Management has been investing heavily in digital with a more up-to-date look, along with enhanced photography and video to better showcase the product. On the previous conference call, management reported that digital was trending back to double-digit sales growth, as the digital business hit an inflection point between the first and second quarter.

Investors should look for the online business to be another positive for the second quarter. Management has guided for digital comparable sales performance for the second quarter to increase year over year in the low to mid-teens range.

Management has been investing heavily in digital with a more up-to-date look, along with enhanced photography and video to better showcase the product. On the previous conference call, management reported that digital was trending back to double-digit sales growth, as the digital business hit an inflection point between the first and second quarter. Investors should look for the online business to be another positive for the second quarter. Management has guided for digital comparable sales performance for the second quarter to increase year over year in the low to mid-teens range.

Investors should look for the online business to be another positive for the second quarter. Management has guided for digital comparable sales performance for the second quarter to increase year over year in the low to mid-teens range.

On the last conference call, management reported that digital was trending back to double-digit sales growth, as the digital business hit an inflection point between the first and second quarter. Investors should look for positive signs from the online business in the second quarter. Management has guided for digital comparable sales performance for the second quarter to increase year over year in the low to mid-teens range.

International growth

 While North America has been a slow-growing market for Lululemon and retail overall, Lululemon's China growth has been anything but slow. 

Newly opened China stores have been generating an impressive $1,600 per square foot, which is way above the retail average of $325, and slightly above Lululemon's companywide sales per square foot of $1,560. Lululemon has also seen strong sales growth in Europe, up 50% in the first quarter.

International represents a $1 billion opportunity for Lululemon or 43% of total revenue in 2016. Because of strong demand, management has been accelerating store openings in Asia, where they see the highest growth potential.

With Lululemon struggling to generate high sales growth in more mature markets, it's important the international side of the business continues to grow strongly as a sign the brand still has relevance among its target market.

Gross margin: Lululemon has been refining its supply chain to improve materials sourcing for its design teams, so the company can respond to market demand faster. This is also intended to improve gross margin.

Lululemon reported an adjusted gross margin of 50.4% for the first quarter, representing an improvement of 2.1% over the 2016 first quarter. Management guided for 1% improvement in the second quarter (excluding the closing of ivivva stores), which would place adjusted gross margin also at 50.4% for the second quarter.  

Looking beyond the next quarterly report, Foolish investors should stay focused on the bigger picture. For the full year, management expects to report EPS of $2.28 to $2.38, up from $2.14 in fiscal 2016. Expectations are relatively low for Lululemon, so any indication that recent efforts in digital, supply chain and new product categories are bearing fruit will be welcome for investors.

10 stocks we like better than Lululemon Athletica
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Lululemon Athletica wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

John Ballard has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.