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lululemon (LULU) to Post Q2 Earnings: Is a Beat in the Cards?

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lululemon athletica inc. (LULU - Free Report) is slated to report second-quarter fiscal 2019 results on Sep 5, after the market closes.

Notably, the company has an impressive surprise history, having delivered nine consecutive earnings beat and 14 straight quarters of positive sales surprise. In the trailing four quarters, it registered average beat of nearly 16%.

lululemon athletica inc. Price and EPS Surprise

 

lululemon athletica inc. Price and EPS Surprise

lululemon athletica inc. price-eps-surprise | lululemon athletica inc. Quote

What to Expect?

The Zacks Consensus Estimate for the company’s fiscal second-quarter earnings stands at 89 cents, suggesting 25.4% growth from the year-ago quarter. In the past seven days, the consensus mark has risen by a penny. The consensus estimate for its revenues is pegged at $842.2 million, up about 16.4% from the year-ago quarter’s reported figure.

Year to date, the stock has mirrored profound strength, rallying about 50% compared with the industry’s growth of 1.6%. This outperformance is mainly backed by the smooth execution of the company’s strategies, which position it for compelling long-term growth.

 


Factors Likely to Influence 2Q19

Product innovation, enhancing omni-guest experiences and expansion efforts remain the key focus areas of lululemon’s five-year plan, Power of Three. Within this plan, the company aims at doubling sales in the men’s and digital categories, and quadrupling sales in the international unit by 2023. Progress on these initiatives is likely to result in gains in the quarters ahead.

Apart from these, management will continue to concentrate on women’s and accessories businesses in North America that have been performing well for a while now. The women’s business and stores in North America are likely to deliver sales growth in a low double-digit annually in the next five years. Further, it plans for the men’s business to witness about 20% sales growth every year.

The momentum in the women’s and men’s businesses was visible in the fiscal first quarter, with comps growth of more than 19% and 26% recorded for these businesses, respectively. Going forward, the company remains optimistic about the innovations it plans to bring in its assortments for men and women. Gains from these innovations and other efforts will likely reflect in its top line in the upcoming quarterly release as well.

Apart from launching new assortments in the core men’s and women’s categories, its product innovation plan focuses on testing new categories. The company identified several new areas, which it can test to bring innovation to guests. One product category, where lululemon is conducting tests, is the self-care, which includes products such as deodorant, moisturizer and shampoo. Tests for this category were rolled out in 50 stores and online in the middle of June 2019.

Additionally, the company intends to tap into customers’ growing preference for athleisure by launching new product lines related to activities like yoga, running and training. Expansion of office luggage and travel bags, and continued partnerships are some of the other product-related initiatives. These add-ons, particularly the self-care business, are likely to be accretive to lululemon’s earnings and sales in the fiscal second quarter.

Additionally, the company remains focused on growing omni-channel and international presence as part of its growth plan. lululemon expanded its online-only size and color offerings for men and women, which is a testament to its efforts to attract digital guests. Moreover, it expanded the buy-online-pick-up-in-store capability to 115 stores in first-quarter fiscal 2019 from 35 stores earlier. It is on track to fully rollout this capability by the end of third-quarter fiscal 2019.

The company is poised to boost international revenues by executing plans to expand in China, the Asia Pacific and EMEA, which are its key growth regions. Of these, lululemon is poised for impressive growth in China in fiscal 2019, driven by strong growth witnessed in the fiscal first quarter. The company recorded nearly 70% market share growth in China in the fiscal first quarter. In Europe, it delivered 40% market share growth in the fiscal first quarter, driven by double-digit comp growth across channels due to robust traffic increases.

In fiscal 2019, the company plans to further boost international presence by opening nearly 25-30 stores. Of this, the opening of about 10-15 stores is planned for China and 5-10 for Europe. Clearly, the company’s omni-channel and international businesses are likely to contribute meaningfully to sales and comps growth in the fiscal second quarter.

Expectations for the Upcoming Quarter

lululemon is likely to witness strong momentum across its business in second-quarter fiscal 2019 and beyond while executing growth strategies. As a result, management issued solid view for second-quarter and fiscal 2019.

For second-quarter fiscal 2019, lululemon anticipates revenues of $$825-$835 million, with constant-dollar comps expected to rise in a low-double digit. The company expects gross margin to be flat to increase marginally in the fiscal second quarter compared with the year-ago quarter. The gross margin view partly reflects impacts of potential tariffs and additional costs to airfreight products to avoid the anticipated congestion at ports in Asia, owing to pending tariff increases.

Further, lululemon envisions earnings of 86-88 cents per share for the fiscal second quarter, whereas it recorded 74 cents in the year-ago quarter.

For fiscal 2019, the company projects revenues of $3.73-$3.77 billion, up from $3.7-$3.74 billion mentioned earlier. It continues to project comps growth in a low-double digit, on a constant-dollar basis. The company expects modest gross margin expansion, driven by anticipated gains in product margins, offset by the aforementioned impacts of potential tariff increases and use of airfreight. Earnings for the fiscal year are projected to be $4.51-$4.58 per share, up from $4.48-$4.55 mentioned earlier.

What Does the Model Say?

Our proven model predicts that lululemon is likely to beat earnings estimates in second-quarter fiscal 2019. A stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

lululemon has an Earnings ESP of +2.74% and a Zacks Rank #3 at present. The combination of the company’s favorable Zacks Rank and a positive Earnings ESP makes us reasonably confident of an earnings beat in the to-be-reported quarter.

Other Stocks Likely to Beat Earnings Estimates

Here are some other companies that you may want to consider as our model shows that these also have the right combination of elements to post an earnings beat.

Burlington Stores, Inc. (BURL - Free Report) currently has an Earnings ESP of +0.17% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar General Corporation (DG - Free Report) presently has an Earnings ESP of +2.64% and a Zacks Rank #3.

Dollar Tree, Inc. (DLTR - Free Report) currentlyhas an Earnings ESP of +7.91% and a Zacks Rank #3.

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