Will Lululemon Stock Be Boosted by LULU’s Q2 Earnings?

LULU's Q2 results should benefit from multiple, positive catalysts

Lululemon Athletica ( NASDAQ: LULU) is slated to report its second-quarter fiscal 2019 results on Sept. 5 after the market closes.

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Notably, the company has an impressive surprise history, having delivered nine consecutive earnings beat and 14 straight quarters of positive sales surprise. In the trailing four quarters, LULU registered an average earnings beat of nearly 16%.

What to Expect from LULU

The Zacks Consensus Estimate for the company’s fiscal second-quarter earnings stands at 89 cents, suggesting 25.4% growth from the year-ago quarter. In the past seven days, the consensus mark has risen by a penny. The consensus estimate for its revenues is pegged at $842.2 million, up about 16.4% from the year-ago quarter’s reported figure.

Year to date, LULU stock has shown profound strength, rallying about 50% compared with the industry’s growth of 1.6%. This outperformance is mainly backed by the smooth execution of the company’s strategies, which position it for compelling long-term growth.

Factors Likely to Influence Q2 Results

Product innovation, enhancing omni-guest experiences and expansion efforts remain the key focus areas of Lululemon’s five-year plan, called the Power of Three. Within this plan, the company aims to double the sales in the men’s and digital categories, and quadruple the sales of its international unit by 2023. Progress on these initiatives is likely to result in gains in the quarters ahead.

Apart from these, management will continue to concentrate on women’s and accessories businesses in North America that have been performing well for a while now. The women’s business and stores in North America are likely to deliver annual low double-digit percentage sales growth in the next five years. Further, LULU is looking for  its men’s business to generate about 20% sales growth every year.

The momentum of the women’s and men’s businesses was visible in the fiscal first quarter, with comps growth of more than 19% and 26% for these businesses, respectively. Going forward, LULU remains optimistic about the innovations it plans to implement in its assortments for men and women. Gains from these innovations and other efforts will likely be reflected in the top line of the results it releases on Sept. 5.

Apart from launching new assortments in the core men’s and women’s categories, its product innovation plan focuses on testing new categories. LULU identified several new areas which it can test in an effort to develop new innovations.

One product category in which LULU is conducting tests is  self-care, which includes products such as deodorant, moisturizer and shampoo. Tests in this category were rolled out in 50 stores and online in the middle of June 2019.

Additionally, the company intends to tap into customers’ growing preference for athleisure by launching new product lines related to activities like yoga, running and training. Expansion of LULU’s office luggage and travel bags, and continued partnerships are some of its other product-related initiatives. These add-ons, particularly the self-care business, are likely to have been accretive to lululemon’s earnings and sales in  fiscal second quarter.

Furthermore, LULU  remains focused on growing its omni-channel and international presence. lululemon expanded its online-only size and color offerings for men and women, which shows that it’s making new efforts to attract digital guests. Moreover, it expanded its buy-online-pick-up-in-store capability to 115 stores in Q1. It is on track to fully roll out this capability by the end of Q3.

LULU is poised to boost its international revenues by executing its plans to expand in China, the Asia Pacific and EMEA, which are its key growth regions. LULU is poised for impressive growth in China in fiscal 2019, driven by strong growth witnessed in Q3. The company recorded nearly 70% market share growth in China in Q1. In Europe, it delivered 40% market share growth in Q1, driven by double-digit comp growth across channels due to robust traffic increases.

In fiscal 2019, the company plans to further boost its international presence by opening nearly 25-30 stores. LULU intends to open about 10-15 stores in China and five to ten in Europe. Clearly, the company’s omni-channel and international businesses likely  contributed meaningfully to its sales and comps growth in Q2.

Expectations for Q3

LULU likely had strong momentum across its business in Q2 and beyond while executing its growth strategies. As a result, management issued solid Q2 and fiscal 2019 guidance.

For Q2, LULU anticipates revenues of $$825-$835 million, with constant-dollar comps expected to rise by a low-double -percentage digit. The company had expected its gross margin to be flat to up slightly in Q2 compared with the year-ago quarter. The gross margin outlook partly reflects the impacts of potential tariffs and additional costs to ship products by air to avoid the anticipated congestion at ports in Asia, due to pending tariff increases.

Further, lululemon envisions earnings of 86-88 cents per share for tQ2, whereas it recorded 74 cents in the year-ago quarter.

For fiscal 2019, the company projects revenues of $3.73-$3.77 billion, up from its previous outlook of $3.7-$3.74 billion. It continues to project low-double digit-percentage comps growth on a constant-dollar basis. The company expects modest gross margin expansion, driven by anticipated gains in product margins, offset by the aforementioned impact of potential tariff increases and increased shipping by air. Earnings per share for the fiscal year are projected to be $4.51-$4.58 per share, up from $4.48-$4.55 mentioned earlier.

What Does the Model Say?

Our proven model predicts that LULU is likely to beat analysts’ consensus earnings estimates in Q2. A stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

LULU has an Earnings ESP of +2.74% and a Zacks Rank #3 at present. The combination of the company’s favorable Zacks Rank and a positive Earnings ESP makes us reasonably confident of an earnings beat in the to-be-reported quarter.

Other Stocks Likely to Beat Earnings Estimates

Here are some other companies that you may want to consider as our model shows that these also have the right combination of elements to post an earnings beat.

Burlington Stores (NYSE:BURL) currently has an Earnings ESP of +0.17% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar General (NYSE: DG) presently has an Earnings ESP of +2.64% and a Zacks Rank #3.

Dollar Tree (NASDAQ: DLTR) currently has an Earnings ESP of +7.91% and a Zacks Rank #3.

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