If there’s one thing Lululemon Athletica inc. (NASDAQ:LULU) earnings generally provide, it’s fireworks. Shares have tended to shimmy after the company’s more recent reports. After Q1’s announcement in May, LULU stock gained 11.5%. That followed a 23% decline after Q4 results in late March, and a 15% gain after Q3’s figures in December.
As a result, heading into Lululemon’s second-quarter earnings report, the options market was pricing in an 11% move in the stock.
But it doesn’t look like shares will have that much wiggle this time around, even after a Q2 beat. LULU stock is up 7% in Thursday’s early after-hours trading, and that seems about right. Second-quarter numbers were solid (more on that in a moment), but guidance for the back half seems merely and reasonably in-line. A 24x EPS-plus-cash valuation looks hefty for any retailer in this environment, and 2% same-store sales growth shows the continuing deceleration in Lululemon comps.
The earnings are good news, no doubt, and will keep the bears at bay for at least another quarter. But at $61 per share, even the good news looks pretty well priced in.
Lululemon Second-Quarter Earnings
Lululemon reported an undoubtedly solid quarter. Net revenue of $581 million increased 13% year-over-year, beating consensus estimates by $13 million and coming ahead of guidance for $565 million-$570 million. Adjusted EPS of 39 cents were up a penny year-over-year, and beat the consensus by 4 cents.
A closer look shows more reason for optimism.
Comparable-store sales, which include direct-to-consumer, rose 7% year-over-year, thanks mostly to a 29% increase in DTC sales. That strength is welcome, as it shows the company’s ability to manage declining in-store traffic.
There’s a reason other major apparel makers like Nike Inc (NYSE:NKE) and Under Armour Inc (NYSE:UA, NYSE:UAA) are trying to grow DTC revenues themselves. LULU bulls no doubt will point to that number as one of the quarter’s highlights, particularly given a huge acceleration from flat DTC sales in Q1.
Gross margin — another key figure — rose 180 basis points YOY. Lululemon is driving its revenue through demand, not through promotions or clearance. Adjusted operating margin did decline by 160 bps, however, as higher expenses offset the improvement in cost of sales. But those expenses should moderate over time as Lululemon is able to pull back on investing in the business.
There’s a lot that supports the bull case for LULU stock. At the least, it contradicts some of the more bearish narratives.
The argument of “peak athleisure” seems to take a hit given broad strength in sales. Competition from companies like Gap Inc (NYSE:GPS), through its Athleta brand, isn’t denting pricing. Lululemon did have a big online sale, which helped DTC revenue. But that aside, direct sales still rose 15%, and the increase in gross margin shows that overall LULU did a nice job managing pricing (long a major worry surrounding the stock).
Again, Lululemon earnings are good news. But I’m not sure they’re good enough to keep a bull run in LULU stock going.
Growth Seems Priced Into LULU Stock
At an after-hours price above $61, LULU trades at about 23x the midpoint of FY17 EPS guidance plus its $5-plus per share in cash. That seems pretty reasonable.
Still, as good as some of the numbers here look, same-store sales did increase just 2%, which usually isn’t enough to leverage expenses. Adjusted operating income rose a fraction of a percent.
And while Lululemon did increase full-year guidance, most of the lift came from the Q2 beat. Q3 adjusted profit guidance is actually below consensus (50 to 52 cents versus 52 cents estimated), and the full-year range of $2.35-$2.42 is ahead of the Street by the same 4-cent spread seen in Q2.
In other words, second-half expectations shouldn’t really change that much — and perhaps, neither should the valuation of LULU stock. Lululemon earnings could have been much worse. But traders and investors expecting another round of fireworks soon might well be disappointed.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
