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Lululemon (LULU) Down 2.2% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Lululemon (LULU - Free Report) . Shares have lost about 2.2% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

lululemon Tops Q3 Earnings & Sales Estimates, Ups View

lululemon delivered solid third-quarter fiscal 2018, with sales and earnings surpassing estimates and improving year over year. This marked the seventh consecutive earnings beat while sales topped estimates for the 12th straight quarter.

The strong fiscal third-quarter results reflected broad-based growth across all categories, channels and geographies. Further, the company witnessed significant comparable store sales (comps) growth, which demonstrates the success of its strategy to acquire guests. Notably, guest acquisition increased 41% in the fiscal third quarter, significantly driving traffic growth across channels.

lululemon is likely to witness strong momentum across its business while executing growth strategies in the future. Consequently, management provided a solid view for the fiscal fourth quarter and raised its guidance for fiscal 2018. Driven by these, the company remains on track to deliver revenues of $4 billion for fiscal 2020.

Q3 Numbers

lululemon posted adjusted earnings of 75 cents per share, beating the Zacks Consensus Estimate of 69 cents and up 33.9% from 56 cents in the year-ago quarter. Earnings gained from solid top-line growth along with significant improvements in gross margin and SG&A expenses.

This Vancouver, Canada-based company’s quarterly revenues advanced about 21% to $747.7 million and comfortably surpassed the Zacks Consensus Estimate of $734 million. On a constant-dollar basis, revenues increased 22%. The improvement can be attributed to the strong performance across all parts of the business. Notably, e-commerce contributed $189 million to sales, representing 25% of total sales.

Total comparable store sales (comps), including in-store comps and direct-to-consumer sales, grew 17% while constant-dollar comps were up 18%. Comps growth was driven by increase in traffic and conversion rates, both across stores and online. In-store comps improved 6% (or an increase of 7% in constant dollars) while DTC comps surged 44% (or an increase of 46% in constant dollars).

Traffic and conversion were boosted by improving capabilities in personalized digital marketing, which led to 41% increase in guest acquisition. Consequently, traffic at stores improved in the high-single digit while it rose more than 35% at e-commerce sites.

Margins

Gross profit rose 26% to $406.8 million in third-quarter fiscal 2018. Moreover, gross margin expanded 220 basis points (bps) to 54.4%, substantially higher than the company’s guidance of 100 bps expansion. This improvement can be attributed to 280 bps improvement in product margin, backed by reduced product costs, favorable product mix and lower markdowns. This was partly offset by 30 bps impact from reinvestment in product innovation and distribution center upgrades as well as 30 bps negative currency impact.

Operating income increased nearly 26% to $135.9 million while the operating margin expanded 80 bps to 18.2%.

Store Updates

During the fiscal third quarter, the company opened 11 stores and completed nine co-located remodels. As of Oct 28, 2018, it operated 426 stores.

For fiscal 2018, the company targets opening nearly 36 company-operated stores, including 20-25 stores in international locations. It expects to open 14 stores in the fiscal fourth quarter.

Financials

lululemon exited the fiscal third quarter with cash and cash equivalents of $703.6 million, and stockholders' equity of $1,406.8 million. Inventories were up nearly 25% at $496 million.

As of Oct 28, 2018, lululemon generated cash flow from operating activities of $316.9 million. Further, it spent nearly $73 million toward capital expenditure in third-quarter fiscal 2018, mainly related to IT investment and supply chain, data and analytics, and store capital in both new stores and renovations.

During the fiscal third quarter, the company bought back 64,729 shares at an average price of $124.95 per share. As of Oct 28, it had nearly $185 million remaining under its existing buyback authorization.

Q4 Forecasts

For fourth-quarter fiscal 2018, lululemon anticipates revenues of $1.115-$1.125 billion, with constant-dollar comps expected to increase in the high-single digit to low-double digits. The company expects gross margin to improve 50-100 bps compared with the year-ago quarter. This is likely to be driven by higher product margins, alongside an incremental reduction in average unit costs, backed by ongoing supply-chain initiatives to scale efficiencies. Management anticipates SG&A expenses rate of flat to up 50 bps driven by the continuation of select opportunistic investments.

lululemon envisions earnings of $1.64-$1.67 per share for the fiscal fourth quarter compared with adjusted earnings per share of $1.33 in the year-ago quarter. Effective tax rate is expected to be nearly 30%.

FY18 View

Following the strong results and the ongoing momentum in its business, lululemon raised its outlook for fiscal 2018. The company now projects revenues of $3.235-$3.245 billion compared with $3.185-$3.235 billion mentioned earlier. The guidance is based on comps growth of mid-teens on a constant-dollar basis versus the previously mentioned low-teens comps growth. Notably, sales and earnings for fiscal 2018 will include a modest benefit from the 53rd week.

The company now expects gross margin expansion of 150-200 bps for fiscal 2018, driven by anticipated gains in product margins, and leverage on occupancy and other fixed costs. It earlier projected gross margin expansion of 100-150 bps. It continues to anticipate SG&A expenses to leverage modestly due to efficiencies within its cost structure and consistent with the 2020 plan.

Earnings for the fiscal year are now projected to be $3.65-$3.68 per share compared with the previous guidance of $3.45-$3.53. The adjusted effective tax rate is now expected to be 29.5% in fiscal 2018, slightly lower than the previously mentioned 30%. Tax gains result from the refinements under the new tax reform.

Capital expenditure for fiscal 2018 is now estimated to be $235-$245 million, marking a reduction from $240-$250 million stated earlier. The lowered guidance reflects some store openings being shifted to the next year. Capital spending will be directed to the ramp-up of renovation and relocation programs, store openings, and investments in technology and other general infrastructure projects.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Lululemon has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 this revision looks promising. It comes with little surprise Lululemon has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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