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Lululemon (LULU) is set to report third quarter fiscal 2018 earnings results after the closing bell Thursday. And with its stock surging 70% year to date, including rising 10% just in the past five days, investors want to know if LULU has stretched too far.
Where other retailers have failed, the yoga powerhouse — currently on a streak of seven straight earnings beats — has managed to thrive. And it’s not out of the question to expect another beat-and-raise quarter on Thursday, thanks to a strong Q2 report, during which revenues grew 25% and total comparable sales were up 20%.
The so-called “Athleisure” category in particular not only remains hot in the U.S., international growth has also gained momentum. On Thursday Wall Street will want to know if these trends are sustainable.
For the quarter that ended October, Wall Street expects the athletic apparel maker to earn 69 cents per share on revenue of $735.93 million. This compares to the year-ago quarter when earnings came to 56 cents per share on revenue of $619.02 million. For the full year, earnings are expected to rise 39% year over year to $3.60 per share, while revenue of $3.23 billion would mark a 21.9% increase year over year.
In the second quarter, LULU showed no signs of slowing down, delivering an impressive 25% revenue increase. The growth was driven by strategic improvements in the company’s core sales channels, which ignited a 10% jump in same-store-sales. Just as impressive, the e-commerce division continue to ramp up its capabilities, with revenues surging 65% year over year.
Essentially, the company — despite charging a premium price for its gear — continues to outgrow its competitors such as Nike (NKE) and Under Armour (UA). This trend has contributed to a strong boost to Lululemon’s operating margin, which in the second quarter rose to 20% of revenue, marking a three-year high.
And here’s the thing: The fact that the company’s e-commerce segment is growing faster than its physical stores will help Lululemon maintain its operating margin for the foreseeable future.
It would seem the operational improvements new CEO Calvin McDonald has made are taking shape. From a valuation perspective, the stock is not cheap. The shares are trading at around 38 times fiscal 2019 earnings-per-share estimates of $3.23. But it would be a mistake to part with these shares now, despite their popularity. Given the company’s growth momentum and the fact that consumers don’t mind paying a premium price for a premium brand, Lululemon’s stock could end the year at all-time highs, trading north of $165.