Lululemon Blows Through Its Earnings Targets

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Investors found new reasons to be excited about Lululemon Athletica’s (NASDAQ:LULU) business this week. The athleisure apparel retailer’s earnings trounced growth expectations in the second quarter, which ended in early August.

Lululemon management also raised its sales and revenue outlook after its margins jumped to new highs. There are some major risks ahead, but the upcoming holiday season could be a blockbuster one for the company.

Let’s dive right in.

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Lululemon has been beating targets

Wall Street was expecting some strong growth figures, with sales likely to rise by about 50% compared to 2020’s unusually weak Q2. That was the upgraded forecast that executives issued back in early June. Yet the chain blew through those targets during the early summer weeks.

Sales instead jumped 61% this quarter as customers flocked to its stores, even as the digital sales channel continued growing from the prior year’s record level. Pressures from new COVID-19 outbreaks didn’t dent its growth.

Revenue gains accelerated, in fact, by expanding on a two-year basis at a 28% rate compared to 25% three months ago. “Our … results demonstrate the continued momentum across the business,” CEO Calvin McDonald said in a press release.

Lululemon is meeting inventory challenges

The company managed to navigate through the difficult supply chain environment without a hitch, too. While there were some supply chain disruptions and higher transportation costs, profit margins continued soaring. Gross profit landed at 58% of sales, setting another multiyear record, and operating margin was a blistering 20% of sales.

Lululemon got help in this area from its surging revenue base, a steady drumbeat of new innovative product releases, and a continued tilt in demand toward premium products. These factors all supported higher average prices. Adjusted earnings jumped to $1.65 per share compared to $0.74 per share a year ago. “Our performance in Q2 was driven by a strong response to our product offering, improving productivity in our stores, and sustained strength in e-commerce,” CFO Meghan Frank explained.

Looking ahead

Shareholders were treated to their second straight growth upgrade in fiscal 2021. Lululemon management now believes sales will land between $6.2 billion and $6.3 billion this year compared to the $5.9 billion forecast in early June. The profit outlook was boosted, too, with earnings now set to range from $7.38 to $7.48 per share, up from the prior range of $6.73 to $6.86 per share.

The stock soared in early trading following the report as Wall Street analysts scrambled to realign their valuation models. Lululemon is seeing accelerating growth that, combined with improving productivity, promises to generate soaring earnings in 2021. While some of that spike can be pinned on the economic environment, it’s clear that the business is also winning share across a wide range of demographics.

And, with demand rising and inventory levels low heading into the holiday shopping season, it’s looking more likely that Lululemon will end the year on an especially high note on core operating metrics like customer traffic, average selling prices, and profitability.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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