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What to Watch When Lululemon Athletica Reports Earnings

By John Ballard - Dec 3, 2017 at 11:11AM

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Lululemon has been bucking the trend of the retail industry with solid growth and margin performance.

The athletic apparel company that aims to make you look good while you sweat -- officially known as lululemon athletica (LULU -1.14%) -- will report its financial results for the third quarter on Wednesday, Dec. 6, after the market close.

Lululemon continues to demonstrate its brand is still very relevant in the highly competitive retail landscape, as revenue continues to grow at a roughly midteen rate, margins strengthen, and new designs prove successful.

Here's the nitty-gritty you need to know before Lululemon reports earnings.

Ballet dancer practicing while wearing Lululemon apparel.

IMAGE SOURCE: LULULEMON ATHLETICA

Headline numbers

For the fiscal third quarter, management is calling for revenue to be between $605 million and $615 million, which represents year-over-year growth of 11% to 13%. This expectation is based on a mid-single-digit constant-dollar increase in total comparable-store sales, consistent with the company's trend over the last several quarters.

Over the last few years, management has improved gross margin from 46.9% in fiscal Q3 2015 to 51.6% in fiscal Q2 2017. Lululemon is currently shutting down physical ivivva stores, requiring extra cost, which is expected to cause gross margin in Q3 to be flat with last year's 51.1%.

Operating margin has trended higher over the last few years as well, but the extra expense required for Lululemon's new marketing campaign, This Is Yoga, coupled with management's investments to build out the e-commerce business is pushing down operating profit in the short term.

All in all, management expects to report non-GAAP (adjusted) earnings per share in the range of $0.50 to $0.52, which would be roughly flat over the year-ago quarter's $0.50 per share.

Watch for performance of new products

Lululemon has been a trendy athleisure brand, marketing itself for its balance between function for sweaty workouts and fashion for every other occasion. Being associated as a fashion brand places more importance (and risk) on each season's assortment of design and style.

The success of Lululemon over the last decade has attracted new entrants to the athleisure market, so there are plenty of choices available for customers to find that perfect item at the right price. However, Lululemon has a very strong brand in athletic apparel, and the yoga specialist's continued growth and strength in margins shows that brand power is keeping competitors at bay.

Lululemon reported traffic growth of 23% year over year after the new seasonal storytelling kicked off for outerwear and jackets toward the end of the fiscal second quarter.

Also, Lululemon began partnering with APL to sell the popular niche shoe brand in select stores. Selling shoes is something new for the brand that made a name for itself turning women's yoga wear into a fashion statement, so it's unclear how this will perform, and what management is planning with this new agenda.

Management mentioned that they will be exploring other new category extensions, like the one with APL, in the future. I'm sure that will depend on whether the APL partnership works out well, so investors should listen for any comments about shoe performance on the conference call, especially how that impacts store traffic.

Investors should also listen for how well the new Enlite bra continues to perform. It's become one of Lululemon's best-selling new innovations in 2017, and has helped draw more attention to the brand, which is significant given that it's a pricey product (even by Lululemon standards). The success of Enlite is a perfect demonstration of Lululemon's brand power and its ability to sell premium-priced products when there is the right combination of design and comfort.

Lululemon has a new fabric innovation called Everlux debuting in Q3 designed to efficiently wick away sweat. These innovative synthetic fabrics combined with innovative product design is what largely distinguishes Lululemon's brand from everything else in the marketplace, so how well each new innovation performs in terms of attracting more customers to stores is important for growth.

Men's business

Lululemon continues to target men's as a potential $1 billion business. Core men's products in pants and shorts were up 23% in the last quarter, with the ABC pants driving growth.

Starting in September, Lululemon began a targeted marketing effort for men as an extension of its This Is Yoga campaign. This Is Yoga was responsible for about one-third of the increase in operating expense in Q2, so it's important that Lululemon sees higher traffic and brand awareness in order to earn a good return on investment from this marketing campaign.

International growth

With the North American market becoming more saturated, international growth has to pick up the slack if Lululemon wants to continue growing at a double-digit rate over the long term. Management has been seeing a lot of success in Asia and Europe. Here are some highlights of what's been happening in these markets.

Lululemon's European market was up 50% year over year in Q2. Management is using a densification strategy to open several stores in major cities like Paris and London and then take advantage of digital channels to market the brand to those communities.

It's clear Asian consumers love the Lululemon brand, and management is very optimistic about the momentum and opportunity they have in that area. Lululemon's Tmall digital Chinese business increased 175% last quarter driven by significantly higher traffic and conversion. It plans to open 12 stores in Asia this year in major cities in China. Lululemon is also opening a third store in Japan in the heart of Shinjuku.

Looking ahead

After five years of stagnant stock performance, Lulu's stock is up 39% in the last six months following good back-to-back earnings releases. Lululemon's stock trades for 27 times forward earnings estimates, which looks pricey. But then again, if customers are willing to pay big premiums for its clothes, the stock may be worth it. The next earnings report will give more clues.

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