Lululemon Athletica Might Need to Rethink Its 2020 Goals

Heads turned on Wall Street when Lululemon Athletica (NASDAQ: LULU) hiked its 2018 outlook just a few months into the year. After all, retailers typically wait until at least the halfway point before making big changes to their fiscal targets.

But thanks to the second-quarter results it posted this past week, it's now clear why management was so optimistic back in late May. The yoga apparel specialist's numbers blew past executives' upgraded forecast to force another significant boost to its full-year guidance.

Let's take a closer look.

Trouncing expectations

Despite a 19% sales spike to kick off the fiscal year, the retailer cautioned back in May that growth would likely slow in the second quarter, mainly due to a tougher comparison with the year-ago period. On the other hand, several metrics, including strong customer traffic and successful product launches, suggested even back then that Lululemon's positive momentum might just be building.

The official forecast ended up being quite conservative. Rather than slowing to land between $660 million and $665 million, sales growth held steady at its 25% rate to reach $725 million this quarter. Sales at existing locations increased 10% and combined with a 66% spike in revenue from digital channels to produce market-leading results.

The tilt toward online sales didn't hurt profitability, either, as gross profit margin jumped to 54.8% of sales from 51.2%. This improvement adds weight to management's claim that the business is benefiting from broadly higher demand, especially for its latest innovative product launches.

Bottom-line profitability also rose, as increased spending on the digital sales channel only partially offset bigger gains in other areas. Operating margin soared higher by almost 7 percentage points to 18.5% of sales. "We are very pleased with the consistent performance of our business," board chairman Glenn Murphy said.

Looking ahead

Those booming results necessitated another upgrade to Lululemon's 2018 outlook, and the company now predicts revenue will land between $3.19 billion and $3.24 billion. Executives started the year forecasting roughly $3 billion of sales before raising that target in the first quarter. Comparable-store sales growth should be in the low-teen percentage range, management said, up from the prior prediction of high single digits.

Those positive trends that lifted results so far in 2018, including higher customer traffic and better conversion rates in the online sales channel, appear to be holding as we enter the second half of the year. "We're pleased to see the great results of Q2 across all parts of our business now extending into the current quarter," Chief Operating Officer Stuart Haselden said in a press release.

As a result, management believes revenue will jump to between $720 million and $730 million in the third quarter. Wall Street pros had predicted something closer to $708 million, so investors had to scramble to account for a faster growth pace by pushing shares higher immediately following the earnings announcement.

This earnings report was the first for incoming CEO Calvin McDonald, who limited his official comments to an expression of optimism around working with the management team to build on the retailer's recent successes. McDonald is taking over just as Lululemon is making intense preparations for the critical holiday shopping season ahead. But he could hardly ask for better conditions as he steps in, with the retailer's aggressive target of achieving $4 billion of annual sales by 2020 seeming more likely with each passing quarter.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.