Lululemon Blows Past Expectations: What's Next?

Investors have seen mounting evidence over the past few quarters that lululemon athletica's (NASDAQ: LULU) business was gaining serious momentum. Sales spiked in the holiday quarter, for example, and the athletic apparel retailer raced past its profitability targets.

Impressively, Lululemon improved on that bedrock growth pace as it kicked off its 2018 fiscal year. And, in contrast with other brick-and-mortar businesses, it managed a sharply higher profit margin even as sales tilted toward its digital channel.

Here's a closer look at the yoga apparel specialist's recently released first-quarter results:

What happened this quarter?

The business showed improving trends across the board, with sales and profit growth beating management's targets and putting Lululemon on pace to cross $3 billion in revenue this year.

The key highlights of the quarter:

  • Comparable-store sales spiked higher by 19% to significantly outpace management's late March prediction that comps would expand at closer to the prior quarter's 11% boost.
  • Digital sales played a starring role in that outperformance, with e-commerce sales soaring 60% compared to the prior quarter's 44% jump.
  • Gross profit margin improved to 53.1% of sales from 50.4% a year ago, as new releases in the Speed Up and City Sweat lines attracted strong demand at higher prices.
  • Lululemon aggressively invested in its digital selling channel, but the spending didn't hurt profitability. Instead, operating margin jumped to 16% of sales from 12% in the prior year.
  • Combined with a lower tax rate, the improvements in the gross and operating margins sent net income higher by over 140%.

What management had to say

Lululemon is still working to fill its CEO position after the abrupt departure of Laurent Potdevin, but other members of the executive team were happy to let the latest numbers speak for themselves.

"We are pleased with our continued strong results," said chairman of the board Glenn Murphy in a press release. "Our results reflect the ongoing strength of our business," chief operating officer Stuart Haselden added, "and our continued focus on product innovation, global growth, digital acceleration, and most importantly, investing in our people."

Looking ahead

While it's early in the fiscal year, the first-quarter results were strong enough to convince management to hike their 2018 targets for both top and bottom lines. Executives still believe sales growth will slow over the next few quarters, but not by as much as they had predicted just a few months ago.

Comparable-store sales are now targeted to rise in the high single digits, to push revenue up to between $3.04 billion and $3.08 billion, from Lululemon's prior target range of between $2.99 billion and $3.02 billion. Profits should land between $3.10 and $3.18 per share, rather than management's previous goal of $3.00 to $3.08 per share.

Overall, it's hard to find much that investors could complain about in this report. Lululemon is finding ways to wow its customers both online and across its 400-store selling footprint, and that success is translating into dramatic profit improvements. The lack of a permanent CEO remains a concern, but the incoming leader could hardly ask for a better situation to step into than the record sales and near-record profitability that Lululemon is enjoying today.

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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.