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Yoga sports apparel specialist Lululemon (LULU) is set to report first quarter fiscal 2020 earnings results after the closing bell Wednesday.
LULU stock is known for its significant price movements after the numbers are released. And this quarter won't be any different, thanks to expectations being so high. The shares have already risen 41% year to date, including 20% gains in the past three months, besting the S&P 500 index in both spans. The company has benefited not only from strong top-line growth, but also LULU’s cost-cutting efforts along with innovative product launches. These have given it tons of earnings power in the previous fiscal year, which should carryover to the next few years.
In other words, where other retailers have failed, the yoga powerhouse — currently on a streak of eight straight earnings beats — has managed to thrive. What’s more, the company is now scaling to become a full-fledged athletic brand with expansion into areas such as athletic shoes and personal care products. Combined with its e-commerce momentum and supply chain improvements, there are plenty that analysts will want to cover. To the extent LULU can deliver another beat-and-raise quarter, the stock may yet be cheap despite trading at all-time highs.
For the quarter that ended April, Wall Street expects the Vancouver-based apparel maker to earn 71 cents per share on revenue of $757 million. This compares to the year-ago quarter when earnings came to 55 cents per share on revenue of $649.71 million. For the full year, ending January 2020, earnings are expected to rise 20.5% year over year to $4.63 per share, while full-year revenue of $3.77 billion would mark a 14.7% increase year over year.
The top line is expected to grow by 16%, while the bottom line is seen growing 27%. In the fourth quarter, reported in late March, LULU reported earnings of $1.85 per share on revenue of $1.17 billion, along with a 16% surge in same-store sales growth. That led to a better-than 14% jump in the shares. The company is benefiting from a combination of factors, namely improved capabilities in personalized digital marketing and data analytics, which is driving not only more traffic, but also improved sales at the company’s site.
A quick dive showed that traffic at LULU’s e-commerce sites rose more than 30%, while conversion increased solidly. What’s more, the company’s Direct-to-consumer (DTC) comps gained 37% during the quarter. This is important since the DTC business generates higher margins. In other words, the operational improvements the company has made under new CEO Calvin McDonald is paying dividends, particularly in the face of intense competition from the likes of Nike (NKE) and Under Armour (UA).
On Wednesday analysts and investors will want to see whether these trends can continue, particularly in light of concerns of a slowing economy and potential impacts of the trade war. Meanwhile, from a valuation perspective, LULU stock is not cheap, trading at about 35 times forward earnings over the next 12 months, compared to a forward P/E of 18 for the S&P 500 index. But few stocks on the S&P 500 are growing earnings at almost 30%. In other words, LULU is worth the premium.
At the time of publication, the author held shares in Lululemon.