Many retailers have been posting improving results lately thanks to a strong economy, but lululemon athletica (NASDAQ: LULU) has taken that success to another level. The yoga-inspired apparel specialist has seen sales gains spike in recent quarters. And, in contrast to most of its peers, profitability is surging higher as well, even as its business shifts more toward the online selling channel.
Having made the stock one of the market's best performers so far in 2018, investors are expecting these positive trends to continue into the holiday shopping season. Let's take a closer look at the metrics shareholders will be watching in the retailer's earnings report set for Wednesday, December 5.
Rather than slowing down significantly, as management predicted it would, sales gains held steady at a market-thumping 25% in the most recent quarter. That success was powered by healthy growth in both of Lululemon's core sales channels. Revenue at existing retailing stores jumped 10%, in fact, as the e-commerce division jumped 65%.
These market-beating gains are mainly the result of popular new product releases, but Lululemon has also gotten better at converting online browsers into buyers. Those successes, plus the broad-based nature of its demand spike, point to robust growth ahead. For its part, management predicted that sales will land between $720 million and $730 million this quarter, which would translate to around 17% higher revenue.
It's one thing to win market share, but it's more impressive to outpace your peers while charging a premium price for your product. That's exactly what Lululemon has accomplished recently as operating margin shot up to over 20% of sales, representing a roughly three-year high.
Those gains have occurred despite aggressive spending on building out the online sales channel. And they've happened even though the e-commerce segment is growing faster than its physical retailing segment. In other words, Lululemon is becoming more profitable, not less so, as it matures into a multichannel retailer.
Executives point to their premium branding and strong track record for innovation as key contributors to the recent margin expansion. Lululemon is also getting better at marketing its sports apparel through its website. We'll find out on Wednesday whether these wins carried over into the third quarter and lifted operating margin a step closer to its all-time high of 28% of sales.
The updated outlook
CEO Calvin McDonald and his executive team will have the benefit of a few days of peak holiday sales data when they issue their final official outlook for 2018. As it stands today, that prediction calls for revenue to land between $3.19 billion and $3.24 billion as comps rise in the low teen percentage range. Earnings should reach $3.49 per share at the midpoint of guidance. Lululemon has lifted that outlook in each of its last two quarterly outings, and the stock's 60% spike so far this year suggests investors are looking for another upgrade on Wednesday.
Looking further out, the retailer's growth ambitions include expanding into the relatively untapped international market and pushing beyond its core female demographic. In the meantime, the company's intermediate goal of reaching $4 billion of annual sales by 2020 is looking more achievable with each passing quarter.
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