Lululemon Athletica Posts Another Quarter of Double-Digit Sales Growth
Lululemon Athletica (NASDAQ: LULU) struggled over the past two years with questionable design choices, soft e-commerce sales, and the abrupt resignation of its CEO. Yet the stock rallied nearly 90% over the past 12 months, and recently flirted with an all-time high after its fourth-quarter numbers beat analysts' expectations.
Its revenue rose 26% annually to $1.2 billion, beating estimates by $20 million. Its comparable-store sales jumped 16%, or 17% on a constant-currency basis, and its adjusted EPS rose 39% to $1.85, topping estimates by a dime.
For the first quarter, Lululemon expects its revenue to rise 14%-15% annually, its comps to grow in the low double digits in constant-currency terms, and its earnings to improve 24%-27%. For the full year, it anticipates 12%-13% sales growth, low double-digit comps growth in constant-currency terms, and 24%-26% EPS growth. Those double-digit growth rates are impressive, but can Lululemon's stock climb higher after nearly doubling over the past 12 months?
Why investors love Lululemon again
Lululemon impressed investors with a consistent streak of double-digit comps and revenue growth over the past several quarters.
| Metric |
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
|---|---|---|---|---|---|
| Comps (YOY growth) |
12% |
20% |
20% |
17% |
16% |
| Revenue (YOY growth) |
18% |
25% |
25% |
21% |
26% |
It attributes that growth to an improved assortment of products, the expansion of its e-commerce ecosystem into new overseas markets,improvements to its supply chain which prioritized the faster rotation of new styles, and the strength of overseas markets like China and Europe -- which reduced its dependence on the tough North American market. It also continued to promote its brand through community events, and even dabbled with an experimental subscription service, which is still being tested out in Edmonton, Canada.
More importantly, Lululemon's gross and operating margins are expanding as its revenue rises. This indicates that it isn't using markdowns to drive sales, and that it's maintaining its premium brand appeal in an increasingly crowded market.
| Metric |
FY 2017 |
FY 2018 |
|---|---|---|
| Gross margin |
52.8% |
55.2% |
| Operating margin |
17.2% |
21.5% |
Lululemon still has other irons in the fire. It expects to expand its portfolio with more men's apparel, strengthen customer relationships with community events and the expansion of its loyalty program, increase its presence in China and Europe, and launch new digital platforms in Japan, France, and Germany.
Lululemon opened 36 new stores in 2018 and finished the year with 440 stores, and plans to open 40 to 50 new company-operated stores (including 25 to 30 international locations) in 2019. That expansion indicates that it's unaffected by the "retail apocalypse" that has crushed some other apparel retailers.
Paying a premium for its own stock
Lululemon currently trades at nearly 40 times forward earnings. That P/E ratio is much higher than its EPS growth rate, so the stock isn't cheap.
However, Lululemon bought back plenty of its own shares in the past. It repurchased 1.5 million shares of its stock during the fourth quarter at an average price of $121, which completed the $600 million buyback plan it authorized last year. It also authorized a new $500 million buyback plan for 2019, which indicates that the company doesn't think its stock is overvalued.
Community vs. competition
Lululemon faces plenty of competition in the athleisure market. Gap (NYSE: GPS) opened 13 new Athleta stores last year, bringing its total store count to 161. Gap didn't disclose exact sales figures for Athleta in its most recent report, but said that the brand grew its market share last year, that its customer base grew by over 20%, and that its comps rose nearly 30% in the fourth quarter.
American Eagle's Aerie brand, which posted 23% comps growth last quarter, has also expanded beyond lingerie to sell yoga apparel. Meanwhile, Amazon launched its Core 10 yoga pants to compete against Lululemon, and top athletic brands like Nike and Adidas remain perpetual competitors.
However, Lululemon also constantly widens its moat against those rivals by offering free yoga classes at its stores and various fitness events, all of which promote a sense of community for the brand. Its impressive growth over the past year indicates that strategy is working. For example, 200,000 runners joined its third annual 40-80 running event (with the Strava social fitness network) this year, representing a 90% increase from the prior year.
Does Lululemon deserve to go higher?
Lululemon's stock isn't cheap, but it could climb higher if its impressive streak of double-digit sales, comps, and earnings growth continues. Its margins are expanding, it has plenty of ways to continue growing, and it could widen its moat by promoting its brand through community events.
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