No one knows how to make a comeback quite like yoga apparel retailer Lululemon Athletica inc. (NASDAQ:LULU). The company has seen its fair share of struggles after a painfully public scandal with its management team hurt investor confidence and overarching problems in the retail sector weighed on the company’s future.
However, LULU stock has proven that building a brand that people will stick with through thick and thin is the most important ingredient to success in the retail space.
First-quarter results showed that the company has put its past problems firmly in the rearview and the figures suggested a rosy future. While there are still some questions about LULU’s future, all in all the earnings report solidified Lululemon’s position as the comeback kid of retail.
LULU reported EPS of $0.55 per share on revenue of $649.7 million for its fiscal first quarter. The company blew analysts’ earnings expectations of $0.46 per share out of the water and revenue was up 25% from the previous quarter.
Perhaps more importantly were lululululemon’s same-store sales. Comps were up 20% overall and comparable-store sales in its physical locations were up 8%. That’s impressive, considering that many retailers have been considered successful for posting comps in the single digits this earnings season.
LULU’s success at its physical locations also cannot be overlooked because we’ve seen progress in e-commerce cannibalize in-store sales for quite a few retailers over the past year as they build stronger presences online. However, LULU’s ability to continue to attract customers to its brick-and-mortar stores shows that it has worked out a way to create a unique shopping experience that gets people to show up.
Another big win for LULU was its direct-to-consumer revenue, which rose 62% in the first quarter. This segment includes the company’s online sales and makes up more than 20% of overall revenue. Over the past year, lululemon has made a major push to up its online game by overhauling its website and adding new purchase options. The DTC improvement suggests that those investments have paid off and should give investors some confidence in management’s ability to keep the business current.
Any Bad News?
LULU stock was up more than 6% in premarket trading on Friday morning as investors digested the quarterly results, and rightly so — it was pretty much all good news. However it’s worth noting that not everything is gold-plated at lululemon. Although there’s nothing terribly wrong to report, investors should still consider a few questions regarding the company’s future before jumping in with both feet.
Most importantly, who is going to head up the company? Lululemon is still working to find a replacement Chief Executive Officer after Laurent Potdevin stepped down earlier this year following claims of inappropriate behavior. Potdevin was LULU’s second CEO in the space of just four years, so his replacement will be an important consideration for investors.
The company needs to find someone with a clean image who will stick, as another CEO departure will paint LULU’s corporate culture in an unflattering light and could irreparably shake investor confidence. So far, there’s been no word as to who the board has in mind, but that’s certainly something to consider when you think about LULU’s future.
Another big consideration for LULU stock investors is the company’s new menswear line. Lululemon management said it sees menswear making up 25% of its business by 2020. That represents a significant proportion, but so far there’s been no concrete evidence as to whether or not the firm is on track to meet that goal.
The Bottom Line
The management team at lululemon deserves some serious kudos after the turnaround they’ve pulled off. Performing this well despite its CEO drama is an impressive feat. Given a more stable environment, the company is likely to continue to beat expectations and turn in strong performances quarter after quarter.
Barring anymore unforeseen issues, LULU is likely to continue benefiting from its loyal customer base and the rising popularity of athletic gear. The company looks to be successful in its international expansion efforts and its growth runway appears to be long. If a suitable CEO can be found — one who won’t leave the company high and dry — I’d say LULU investors are likely to enjoy steady gains over the next year.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.