After reporting solid earnings at the beginning of last month, athletic wear company Lululemon Athletica Inc. (NASDAQ:LULU) has continued to trend higher on expectations that the company will be able to continue its forward momentum in driving earnings higher than analyst expectations moving forward.
Let’s look at LULU’s most recent earnings report to better understand where the company is headed and how the operating business’s underlying fundamentals support a bull thesis for LULU moving forward.
The athletic wear retailer beat both top- and bottom-line estimates, posting a 13% increase in year-over-year revenue to $581 million in Q2 2017 compared to Wall Street estimates of $568 million, a beat of approximately 2.3% on the company’s top-line numbers.
For LULU’s bottom line, the company actually beat earnings estimates by a wider margin, posting earnings per share of $0.36 ($0.39 per share after adjustments), beating analyst estimates by more than 11%. The company’s reported net income of $48.7 million represents a net margin of 8.4%, which was much higher than expected given the recent turmoil the company has seen surrounding closures of its Ivivva stores.
Growth for LULU
Much of the story around LULU centers on the retailer’s ability to grow its top- and bottom-line through aggressive expansion. Indeed, one of the hardest hits the company has taken of late has been attributed to the strategic move to repurpose many of its Ivivva stores, shutting the doors on a line of business that was seen to have significant potential for a market segment that remains underserved.
Looking past these store closures, however, investors looking directly at the numbers and nothing else will notice the growth trajectory of the company has remained intact. Management continues to assert its belief that hitting a target of $4 billion in revenue by 2020 remains within reach. Given management’s guidance of 2017 revenue coming in between the range of $2.53 billion to $2.58 billion, an implied top-line growth rate of 16.2% over the three fiscal years (2018-2020) does seem possible, although investors will need to see consistency in how LULU is able to churn out double-digit growth quarter over quarter and YOY.
Same-store growth is another key metric many investors have been looking to for share-price appreciation. Opening new stores is fine, but if existing stores continue to see stagnant or declining growth, LULU’s underlying business model supporting its hefty growth story could potentially lose credence with investors. These are the same investors who have ascribed a lower valuation multiple to the growth company, a multiple currently sitting at 29 times earnings. Luckily for LULU, this past quarter saw same-store growth expand modestly YOY by 2%, again beating analyst expectations of comparable store growth in the 1.5% range.
Beyond LULU’s bread and butter, the company’s direct-to-consumer segment is another segment investors have been watching closely, a segment which grew by 7% in comparable sales from last year, reflecting strong growth within the company’s multichannel distribution model. In order for LULU to continue to strive for its aggressive $4-billion revenue target, segments such as direct to consumer will become even more important for the business in the coming quarters.
Bottom Line for LULU Stock
LULU is a company that has continued to post strong growth numbers, despite strategically reorganizing operations yet again this past quarter. For a company that has managed to shift its focus multiple times in recent years, its consumer base supported by a robust base of loyal customers has allowed the business to thrive in the throes of chaos. Given the company’s strong balance sheet and premium market position relative to competitors, the number of tools available in LULU’s tool chest remain vast. Should the company wish to lever up to achieve its $4-billion target, it is hard to imagine a scenario where LULU does not achieve its desired medium-term outcome.
With a set of clearly communicated goals and a management team which appears ready to deliver results to shareholders, it makes sense that LULU’s share price has popped significantly over the past month. Perhaps it should have popped more.
