I’m not quite sure if the latest quarterly earnings from Lululemon Atheletica inc. (NASDAQ:LULU) defeats my thesis that clothing retailers are stocks to avoid, or if it is the exception that proves the rule.
Let me restate that thesis, point out a couple of interesting things from the LULU earnings report, and get a feel for where LULU stock may be headed in the future.
My thesis regarding clothing retailers is that only the truly strong brands that speak to consumers survive. Most other clothing retailers will come out of the gate strong, their stocks will fly higher as the company reports strong growth, and then inevitably, growth sags, and the stocks plummet. It’s why I avoid clothing retailers.
The question is whether LULU is going to become a long-term competitor to Nike Inc (NYSE:NKE) or crater like many of its brethren. Its last earnings report, however, provides some surprising good news to investors.
The comparable store sales metric is what we are always looking at first when it comes to retailers of any kind. For the fourth quarter, LULU delivered comp store sales increases of 2%, or 1% on a constant dollar basis. That’s nothing to get too excited about.
However total comparable sales increased 12%, or 11% on a constant dollar basis. Obviously this includes online sales. It is the online strategy that I think is going to make the difference for LULU in the future.
All the numbers on the e-commerce side were exceptional. E-commerce saw a 42% constant dollar increase in the quarter, 20% increase in site traffic, 19% increase in conversion, 19% increase in direct visits, and 32% increase in email visits. E-commerce is working for Lululemon. No doubt about it.
Comp store sales were also up 1% for the year, while total comparable sales increased 7%.
These good numbers did follow through to the rest of the profit and loss statement.
Quarterly gross profit increased 22% to $522 million. That also came along with a gross margin increase of 210 basis points. Income from operations hit $256 million, which was an increase of 30% year-over-year. And diluted earnings per share, on an adjusted basis, hit a $1.33 per share compared to $1 last year.
These are all pretty spectacular numbers. Full-year numbers were also very strong.
When we pull those numbers apart, things still look good. Lululemon benefited from market share gains across geography, channel and categories. Asia was a big hit with comps on a combined basis of 52% for the quarter, and Europe saw growth of 42%.
Lululemon also tried a “seasonal shopping strategy” involving pop-up stores in various locations depending on the season. LULU benefited from 24 of these pop-up stores, and not just in terms of additional revenue.
Apparently this is a great way to engage in customer acquisition. Management said that 40% of the customers who shopped at a LULU pop-up store had not purchased anything from Lululemon before.
Bottom Line on LULU Stock
The LULU stock price is 30 times fiscal year 2018 earnings. As a growth stock that is currently delivering 20% EPS growth, paying a PEG ratio of 1.5 is not at all unreasonable. It certainly seems to me that Lululemon is executing in a way that companies like Under Armour Inc (NYSE:UAA, NYSE:UA) aren’t.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
