You Should Have Seen This Banner Quarter in LULU Stock Coming

Before I get into the highlights of Lululemon’s (NASDAQ:LULU) fourth-quarter earnings, which has LULU stock up 15% on the day as I write this, investors should have seen a good report coming.

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I recently named Lululemon one of 7 Retail Stocks Winning in 2019 and Beyond.

I’ve been a strong supporter of the company for a while now. In 2016, I predicted that LULU stock would be one of the top S&P 500 stocks over the next decade. In July last year, I opined that the company’s hiring of Calvin McDonald as CEO was a brilliant move. Considering how it’s done since then, I’d say I was spot-on.

I’m not trying to toot my horn. I’m merely saying that some times you have to forget all the noise about retail this, and retail that, and walk into a store or try a company’s product or service to know that it’s dialed in.

Here’s what I said in March about my visit to LULU:

“I got my wife a LULU gift card for our wedding anniversary in February. We recently stopped in at the only Lululemon store currently open in Halifax; it was packed on a Saturday afternoon. So busy, in fact, that we decided to leave because we couldn’t get any service.”

Anyone could have gone into their local Lululemon in March and realized that the demand for its apparel is off the charts at the moment.

A killer quarter was glaringly obvious to anyone who bothered to look.

LULU Stock and the Q4 Report

Revenues were $20 million higher than analyst expectations for LULU at $1.17 billion. It was the company’s first quarter over $1 billion. Earnings were $1.85 a share, 11 cents better than the consensus.

Compared to last year, revenues increased by 26% while earnings per share on an adjusted basis were 39% higher year over year.

Other strong numbers in the quarter: gross margins were 100 basis points higher at 57.3%, its operating margin was 80 basis points higher at 28.4%, and its effective tax rate dropped from 53.5% to 34.6% as a result of the lower U.S. corporate tax rate.

About the only blemish was same-store-sales growth, which met analyst expectations, up 17% excluding currency.

However, even with that, there was a silver lining.

While the brick-and-mortar stores saw 7% same-store-sales growth excluding currency, its online business had a 39% increase in revenue in the quarter and 46% for the entire year.

Also, Lululemon’s Chinese online sales grew by 140% in the quarter, with Japan and South Korea expected to contribute significantly to the company’s future growth.  

The Bottom Line on LULU Stock

To get an idea just how much the pendulum has swung, Toronto-based Canaccord Genuity analyst Camilo Lyon said this about the company’s fourth quarter:

“The fact that LULU has achieved three of its 2020 targets (EBIT margin, gross margin and ecommerce mix) two years ahead of plan speaks to the momentum in the business and strength of the leadership team,” Lyon said about the results.

Only 18 months ago, Lyon was highly skeptical about Lululemon’s brand.

“We are also witnessing some shifts in brand preferences away from Nike and Under Armour, and in favour of Athleta,”  he wrote in September 2017. “Athleta’s rise could add to LULU’s competitive concerns particularly as Gap (NYSE:GPS) re-focuses its growth efforts on the concept.”

I don’t think there’s any doubt he’s on board the LULU train. He’s got a 12-month price target of $186, 10% higher than where it’s currently trading.

Try and find a flaw in LULU’s fourth quarter. It was a thing of beauty. 

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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