What to Watch in lululemon athletica's Q4 Earnings

The company has already released updated guidance. Here's what to expect, and how the market might react.

Seth McNew
Bradley Seth McNew
Feb 27, 2017 at 5:19PM
Consumer Goods

In January, lululemon athletica (NASDAQ:LULU) released updated Q4 guidance at the top of its previous range, and the company seems to be getting a lot more positive Wall Street sentiment lately. Lululemon stock has been volatile, and even though this updated guidance looks positive, the stock is still down around 15% over the last six months. Is the company set for its recent growth momentum to continue ahead when those results are formally announced in March? Here's what to watch in the upcoming Q4 and full-year earnings. 

Lululemon's updated Q4 guidance looks solid

On Jan. 9, Lululemon released updated Q4 sales guidance for the period ending Jan 29. The company basically just narrowed its guidance to the top range of its previously set guidance, now between $775 million and $785 million compared to the previously set $765 million to $785 million. Earnings per share is now expected to be between $0.99 and $1.01, compared to the previous EPS guidance range of $0.96 to $1.01. 

A woman does yoga on the beach in black Lululemon clothing.

Image source: Lululemon Athletica.

For the third quarter, the company posted sales growth of 13% year over year, and earnings per share of $0.50, above analyst expectations and up 32% year over year. At the top end of the new guidance, Lululemon's Q4 sales and EPS growth would be 11% and 19%, respectively, year over year -- another great quarter for the company.  In the release for the updated Q4 guidance, CEO Laurent Potdevin said this about the company's recent successes: 

We had a strong holiday season in both our store and digital channels driven by our assortment, operational execution and guest experience. Our entire team is excited about the momentum in the business and I am grateful to our global collective for their great work and enthusiasm. We look forward to 2017 as we continue to advance on our long term goals.

What to watch when Q4 earnings come out

There are a few important details beyond total sales growth to look out for in the Q4 report and earnings call to see just how much growth the company could see in the year ahead. One important area is Lululemon's menswear segment. During the Q3 earnings call, management noted that while they are excited about the growth in this segment and their ability to expand what has traditionally been seen as a women's brand, they would like to see men's sales grow even faster than women's and make up a quarter of sales by 2020. More movement toward this goal would be a good sign, and while the company doesn't break out men's sales in its earnings report, management is likely to give more information on this segment in the earnings call. 

A man wears Lululemon shorts on the beach.

Image source: Lululemon Athletica.

Two other interesting details in the coming earnings will be the growth in international and direct-to-consumer sales. Again, the company doesn't break out exact international sales, but we do know that new flagship stores have opened recently in China and London. Even without exact sales (though hopefully the company will give out that information soon), getting more color in the earnings call about how the company's current international expansion initiatives are shaping up and what to expect in the quarters to come will still be helpful.

As for digital sales, we do know that those channels made up 19.1% in Q3 compared to 18.6% of total revenue in Q3 2015. Lululemon needs its digital presence to continue growing as a way to expand to new audiences that it might not reach with its brick-and-mortar stores, without having to settle for putting its products in third-party retailers that would be more susceptible to discounting and would take a cut of total sales, both of which would hurt Lululemon's premium status and the company's high profit margin. While not insignificant, 19% is low compared to some similar companies, and Lululemon should be able to grow this number more in the quarters to come.

Lululemon certainly continues to face competitive challenges as more and more brands seek to increase their premium athleisure wear. Nike (NYSE:NKE) and Under Armour (NYSE:UAA) (NYSE:UA) are among two of the biggest competitors, each growing their presence in the sportswear categories with higher-priced gear made of higher-quality materials, and new items like premium bras and more fashionable menswear that cut into Lululemon's high-end niche. Another competitor not to be missed is Gap (NYSE:GPS) with its Athleta brand, which competes directly with Lululemon's women's athleisure wear segment, and has quickly grown to now 132 locations with 15 more planned for 2017. 

Regardless of this fierce competition, Lululemon is seeing a nice resurgence lately, and that could certainly continue in 2017 as its clothing gains popularity among men and internationally, and the company continues to focus on operational efficiencies. Management has said that it plans to double sales of both men's and women's gear, and more than double earnings, by 2020. That may be a tall order, but even if the company can get part way there in the next three years, that would make its current valuation at 32 times earnings relatively cheap for long-term investors.