On the announcement of its third-quarter results last week, Lululemon Athletica (NASDAQ:LULU) got hit, and Lululemon fell from $233 to $226 or about 3% or so.
For a high-growth company, this is not really too much of a move. Keep in mind that Lululemon stock is up about 83% for the year.
OK then, so what happened in the quarter? Well, Lululemon Athletica beat expectations on the top line, with revenues increasing by 23% to $916.1 million. The Street, on the other hand, was looking for $899 million. But the earnings were a bit light at 75 cents a share, versus the analysts’ consensus of 93 cents.
Yet the biggest issue was the guidance. For the fourth quarter, Lululemon forecasts revenues of $1.315 billion to $1.330 billion and earnings to range from $2.10 to $2.13 per share. But this compares to the analysts’ projections of $1.326 billion and earnings of $2.13 per share.
For the most part, it looked like expectations got overdone – which is normal for a high-growth company. In other words, the quarter should not necessarily be an ominous sign. If anything, it looks like the bull case still looks solid.
The key is the strategic vision and disciplined execution of CEO Calvin McDonald. When he came on board in August 2018, Lululemon had some nagging issues, such as with the culture and difficulties in foreign markets. But McDonald was swift in making significant changes.
Prior to joining the company, he was a top executive at Sephora. So he had the leadership chops to make a difference and a good understanding of consumer and retail markets.
McDonald’s strategy is called the Power of Three: product innovation, omni guest experiences and market expansion. All these should create a strong flywheel to keep up the growth ramp.
The expectation is that the core business will increase by low double-digits for the next five years as men’s clothing and digital are expected to double. Oh, and then there is a prediction of a quadrupling of international business.
Core Strengths of Lululemon
The traditional retail market continues to face tough headwinds from eCommerce players like Amazon.com (NASDAQ:AMZN). But there are certainly ways to thrive. We’ve seen this with companies like Walmart (NYSE:WMT) and Target (NYSE:TGT). Traditional retail has inherent advantages with the physical locations so long as there are compelling experiences.
No doubt, Lululemon knows how to make this work. The company has been rolling out next-generation stores that are more than just about shopping. There has also been much improvement in digital offerings, such as with mobile apps and better search and product display pages.
But Lululemon has a business model advantage as well. Here’s how InvestorPlace.com’s Dana Blankenhorn explains it:
“The secret of Lululemon’s success is that it gets its merchandise made on order, sells only through its own stores and website, and almost never offers sales. People really do pay $110-$120 for a pair of its pants. They’re not getting them for $40-$60 at outlet prices.”
Because of this, Lululemon has been able to generate gross margins above 50%, whereas a typical retailer operation has levels of 10% to 20%.
Bottom Line on Lululemon Stock
It’s true that Lululemon stock is trading at a stretched valuation. Consider that the price-to-earnings ratio is 52X, but then again, the growth story is solid, as there are few signs of any problems.
So while it could be tough to replicate this year’s performance, Lululemon stock should still have the potential to offer solid returns in the new year.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.