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Lululemon Earnings: 3 Takeaways

Investors' expectations continue rising for lululemon athletica (NASDAQ: LULU), but the yoga apparel specialist just keeps blowing past Wall Street targets anyway. That was the scenario once again, when the growth stock this week posted second-quarter earnings results while updating its outlook for the year. The announcement marked Lululemon's sixth straight quarter of outpacing management's forecast and contained other good news around profitability and holiday demand trends.

Let's dive right in.

Yoga students in class.

Image source: Getty Images.

Market-thumping growth

CEO Calvin McDonald and his team predicted a 15% sales increase to $830 million back in June. Given its streak of far exceeding growth targets, Wall Street pros pushed their forecasts higher, to $845 million in the days leading up to the report. But Lululemon trounced both predictions, with revenue landing at $883 million for a 22% increase from the prior-year period.

Growth was equally impressive at stores, where higher customer traffic and increased spending drove a 10% spike in comparable-store sales, and online, which expanded 30%. The e-commerce segment now makes up 25% of revenue, up from 23% a year ago.

"We're pleased with the ongoing strength across our business," McDonald said in a press release. "our success demonstrates the significant runway in front of Lululemon," he continued.

Keeping costs in check

Profits came in above targets, too, likely thanks to the steady stream of popular new products that the retailer has been introducing. Gross profit margin inched higher to 55% of sales from 54.8% and selling expenses fell slightly as a percentage of sales, too. As a result, operating income jumped to $168 million, or 19% of sales, from $134 million, or 18.5% of sales a year earlier.

CFO Patrick Guido had warned investors that increasing costs tied to tariff freight disruptions might hurt profits this quarter, but instead Lululemon kept up its over four-year pace of expanding margins.

Stretching to a higher target

Lululemon has about the best momentum that shareholders could expect heading into the second half of the year and the critical holiday shopping period. To that end, the latest sales trends convinced management to raise their 2019 outlook for the second straight quarter, this time projecting revenue of between $3.8 billion and $3.84 billion.

That target stood at between $3.73 billion and $3.77 billion just three months ago. Hitting the new goal would put the company tantalizingly close to achieving its $4 billion annual sales target – a full year earlier than executives imagined in 2018.

It's a good thing then that management recently issued new long-term targets that give the chain challenging, but achievable goals. These include quadrupling international sales and doubling revenue from the men's and digital selling segments by 2023.

Those forecasts involve pushing into new markets and new geographies that include well-established sports apparel rivals such as Nike. Yet its last few quarterly reports show no signs that Lululemon is struggling to take share either in its core yoga category or in new lines like outwear and men's apparel. Instead, the chain is primed to close out a second straight year of booming sales growth and expanding profit margins as it aims for a far larger annual sales base than $4 billion.

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Demitrios Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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