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Lululemon (LULU) Down 1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Lululemon (LULU - Free Report) . Shares have lost about 1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lululemon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

lululemon Q3 Earnings & Sales Beat, Soft View

lululemon reported better-than-expected top and bottom lines in third-quarter fiscal 2020. Moreover, revenues and earnings improved year over year. Results mainly benefited from strong momentum in omni-channel, driven by strong conversion and increased traffic at e-commerce sites.

Although the company has reopened the majority of its stores across all markets, it witnessed temporary closures and is operating with tight capacity in certain markets due to the resurgence of COVID-19. Consequently, management did not issue detailed guidance for fiscal 2020. Also, the company provided a soft view for the fiscal fourth quarter.

Q3 Numbers

lululemon’s adjusted earnings of $1.16 per share in the fiscal third quarter beat the Zacks Consensus Estimate of 87 cents and improved 20.8% from earnings of 96 cents in the year-ago quarter.

The company’s quarterly revenues rose 22% to $1,117.4 million and surpassed the Zacks Consensus Estimate of $1,012 million. On a constant-dollar basis, revenues increased 21%. The company’s top line primarily benefited from strong total comparable sales (comps) and growth across regions.

Total comps advanced 19% in the fiscal third quarter and were up 18% on a constant-dollar basis. Comps mainly benefited from strength in direct-to-consumer revenues, offset by a decline in comparable store sales (or comps at company-operated stores). Direct-to-consumer revenues were up 94% to 478 million. On a constant-dollar basis, direct-to-consumer revenues rose 93%. Notably, direct-to-consumer revenues contributed 42.8% of total sales in the fiscal third quarter, whereas its contribution was 26.9% in the year-ago quarter.

The company’s comparable store sales declined 17% year over year. During the quarter, nearly 97% of its stores were open. Comparable store productivity increased to 83% of the last year’s volume. On a constant-dollar basis, comparable store productivity was up 82% of the last year’s volume, which was above the company’s expectation of 75%.

Revenue increased across major regions, with growth of 19% in North America and 45% in international markets.

Margins

Gross profit advanced 24% to $627.4 million in third-quarter fiscal 2020. Meanwhile, gross margin expanded 100 basis points (bps) to 56.1% as gains from 170-bps leverage on occupancy and depreciation and 10 bps of favorable foreign exchange were partly offset by 80 bps of deleverage in product margin, which resulted from COVID-led higher freight costs and increased markdowns.

SG&A expenses increased 25.1% to $411.7 million. SG&A expenses, as a percentage of sales, deleveraged 90 bps to 36.8%. The elevated SG&A expenses mainly stemmed from higher marketing investment related to MIRROR, partly negated by leverage on the higher-than-expected sales.

Adjusted operating income rose 21% to $213.5 million. Driven by gross margin expansion, partly offset by higher SG&A expenses, adjusted operating margin contracted 10 bps to 19.1%.

Store Updates

During the fiscal third quarter, the company opened nine net new stores, including 11 store openings and two closures. As of Nov 1, 2020, it operated 515 stores. Moreover, the company is accelerating its seasonal store strategy. It operated nearly 70 seasonal stores in the fiscal third quarter.
 
In fiscal 2020, it expects to open 30-35 net new stores. At the end of the fiscal fourth quarter, the company plans to increase the seasonal stores count to nearly 100.

Financials

lululemon exited the fiscal third quarter with $1.2 billion in total liquidity, which indicates a strong financial position. This included $481.6 million of cash and cash equivalents, and $697.3 million available under its revolving credit facility. Further, its stockholders' equity was $2,163 million as of Nov 1, 2020. Inventories were up 23% to $771 million.

On Dec 4, the company issued a notice to terminate its $300 million worth 364-day revolving credit facility, which was due Jun 28, 2021. However, it retained its five-year $400 million revolving facility that matures on Jun 6, 2023.

During the first nine months of fiscal 2020, the company generated operating cash flow of $85.4 million.

On Dec 1, 2020, its board increased its share repurchase program from $263.6 million to $500 million.

Expectations for Q4

Driven by the COVID-led constraints, the company expects lower productivity levels in fourth-quarter fiscal 2020, compared with historically high productivity levels witnessed during the holiday season. For the fiscal fourth quarter, it predicts productivity to be 70% of the last year’s levels, suggesting trends in line with the third quarter’s non-peak periods.

The company now expects net sales in the fiscal fourth quarter to increase in the mid-to-high teens levels. Earlier, it anticipated sales growth of high-single to low-double digits. Although the company expects e-commerce sales growth to be strong in the fiscal fourth quarter, it expects the same to moderate slightly from the fiscal third-quarter levels as the majority of the company-operated stores have reopened.

Coming to the MIRROR buyout, the company expects a contribution of more than $150 million to revenues in fiscal 2020.

Gross margin for the fiscal fourth quarter is likely to be flat to modestly up from the prior-year quarter. Further, the company expects continued SG&A expenses deleverage in the fiscal fourth quarter as store traffic remains below the last year’s levels as well as continued investments in marketing for MIRROR. Due to the seasonality of the MIRROR investment, it expects deleverage in the fiscal fourth quarter to exceed third-quarter levels.

Backed by the above-mentioned factors, the company now expects adjusted earnings per share and growth rate to increase in mid-single digits for the fiscal fourth quarter. Earlier, it anticipated a modest decline in earnings per share.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

At this time, Lululemon has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Lululemon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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