Lululemon Athletica Inc. (NASDAQ:LULU) delivered its second-quarter results late Thursday, and investors didn’t take kindly to the news. LULU stock dropped more than 8% in after-hours trading, and it was set to open Friday by the same amount. Many in the business media hinted that the cause of the tumble was soft guidance by the company for the second half of the year.
Let me be perfectly clear: There is nothing that I can see in the Q2 2016 earnings report that suggests Lululemon CEO Laurent Potdevin is anything but enthusiastic about the athleisure company’s future.
Before condemning LULU stock for not delivering the goods, it’s important to consider how Lululemon actually performed in the second quarter; what was said by the company when it announced its Q1 2016 results in terms of its outlook for the second quarter and beyond; and finally, what analysts were expecting from the company.
I think if you look at the numbers with the bigger picture in mind, you’ll come to the conclusion that Lululemon’s business is actually doing pretty well right now — especially when compared to where it was at the beginning of 2014 when Potdevin took over.
LULU’s Actual Q1 Performance
A few highlights:
- Same-store sales were up 5% on a constant currency basis.
- Net revenues increased 14% year-over-year to $514.5 million.
- Online revenues excluding one-time online warehouse sale increased 16%.
- Its gross profit margin increased 260 basis points to 49.4%.
- Operating income increased 11% to $74.0 million.
- Inventories actually decreased by 1% to $277.3 million.
- Other revenues, which includes outlets and showrooms, increased 48% year-over-year to $45.7 million or 8.9% of overall revenue.
- More importantly, the outlets and showrooms delivered $4.6 million in operating profit, up 156% from a year earlier.
“The second quarter demonstrated strong results as we delivered sales and EPS at the high-end of our guidance and saw an important inflection in our gross margin and earnings performance,” Laurent Potdevin said. “Our progress in the second quarter, especially in gross margin and inventory, marks the beginning of our recovery in profitability and sustainable long term growth.”
Revenues increased by 14% in the quarter yet inventory decreased by 1%. That doesn’t happen very often. And, as Potdevin suggested, it’s indicative of a supply chain that’s much stronger.
Out of everything I’ve written so far, this is probably its most impressive result.
Lululemon’s Previous Outlook
In June when LULU released its Q1 2016 earnings, guidance for the second quarter was revenue of at least $505 million on mid-single-digit constant-dollar comps and diluted earnings per share of 36 cents per share or higher.
In Q2 2016, Lululemon generated $514.5 million in revenue, 5% constant dollar comps, and 38 cents per share in earnings. It hit all three.
For the entire fiscal year, LULU called for annual revenue of at least $2.305 billion, mid-single-digit comps, and EPS of $2.08. Now, it expects annual revenue of $2.325 billion ($20 million higher than Q1), no change on the comps and at least $2.11 per share in earnings (3 cents higher than Q1).
What’s not to like?
This is where I absolutely lose it when it comes to business media. For some reason, we love to blow things way out of proportion. Let me give you some examples.
One media outlet that will remain nameless focused on the fact analysts had projected Q2 revenues of $515.5 million but LULU had delivered $1 million less. They failed to mention that the company’s range was $505-$515 million. So, you could say that it delivered within $500,000 of the top-end of its guidance. Good news turned bad.
Another media outlet suggested that LULU stock plunged after hours because its 5% same-store sales growth missed analysts’ 5.9% estimate.
Have you seen retail sales these days? There aren’t too many retailers delivering positive comps. I’ll take 5% growth in this kind of environment every day of the week.
Bottom Line on LULU Stock
The smart investors will be backing up the truck after Lululemon’s Q2 report. Warren Buffett always says how much he likes to see his favorite stocks drop in price so he can buy more.
My only question: Do you have the truck gassed up and ready to go?
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.