What Lululemon Wants Investors to Know

It's no stretch to say that Lululemon (NASDAQ: LULU) is on a roll. The yoga-inspired sports apparel retailer just announced a sixth straight quarter of surprisingly strong growth, with both sales and profits landing well ahead of management's guidance.

In a conference call with investors, CEO Calvin McDonald and his team added context to those results and explained the main drivers behind the stock's outperformance. Their discussion included optimism about fiscal 2019 but even bigger plans for fiscal years 2020 through 2023. Let's look at a few highlights from management's second-quarter presentation.

A woman holds a yoga pose.

Image source: Getty Images.

Innovation helps

Guest response to our merchandise offering was particularly strong across the board, as we continue to leverage our key core franchises, while always delivering new innovation.
-- McDonald

Lululemon's sales rose 22% to blow past the 15% boost management had predicted. While several things had to go right to achieve that result, a major standout was the chain's string of innovative product releases. New pants and shorts helped drive 13% higher sales in the core women's division and a 27% spike in the men's niche. The success has executives feeling confident about betting big on new styles for the fall, especially outerwear.

Digital wins

Within our digital business guest engagement continues to be strong and we are focused on pushing forward with improvements to our sites and mobile apps.
-- VP Celeste Burgoyne

Lululemon's long-term plan includes doubling the e-commerce business over the next few years, and these results help demonstrate why management is so bullish about this selling channel. E-commerce sales jumped 31% on top of last year's 47% surge to reach $218 million, or roughly 25% of the broader business.

Investors should see plenty of digital initiatives roll out over the next few months, including new search and browse functionality for the website and mobile apps. Lululemon also just finished rolling out buy-online-pickup-in-store capabilities across its U.S. selling footprint. "So far," Burgoyne said, "the favorable response from guests shows how much they appreciate the flexibility and efficiency of this service."

Outperforming on profits

We remain pleased with the product margin strength we continue to realize on top of the strong gains over the last several years.
-- CFO Patrick Guido

Besides the robust sales growth, the biggest surprise this quarter involved strong profitability. Gross profit margin rose even though the company shelled out for extras like air freight delivery while dealing with negative currency exchange rate shifts and higher tariffs. Executives had suggested that margins might decline this quarter, but actual results were much better than that prediction.

LULU Gross Profit Margin (TTM) Chart

LULU Gross Profit Margin (TTM) data by YCharts.

Looking ahead

We're now two quarters into our 5-year vision, and I'm pleased with the strong execution and passion across the business to continue to deliver on our growth priorities.
-- McDonald

Lululemon is now predicting that sales will pass $3.8 billion in 2019, putting it close to reaching its past $4 billion annual goal a full year earlier than planned. Profitability should rise for a fifth straight year, with gross profit margin passing 55% of sales compared to about 48% back in 2015.

Its future targets are an expanded men's client base and more sales in new categories like outerwear and geographies including Europe and China. These goals put it in direct competition with bigger, established rivals like Nike. But it's hard to blame management for being aggressive given the positive momentum they're seeing in several areas of the business today.

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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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