Lululemon Athletica (LULU -2.00%) stock was up following a strong earnings report, building off the company's similarly robust second quarter results. The athleisure brand enjoyed solid performance across every area, including in-store, digital channels, and international.
CEO Laurent Potdevin shared updates during the earnings call on the company's long-term trajectory -- here's what you need to know.
Management believes $4 billion in revenue is within reach
Delivering on our strategy enabled us to drive an acceleration in our business in Q3. Comps were up 7% on a constant-dollar basis. Adjusted gross margin improved 110 basis points, and adjusted EPS grew 19%. These results exceeded our guidance and keep us on our path toward delivering $4 billion in revenue in 2020.
Over the last few years, Potdevin has been implementing many changes across the company to get Lululemon back on a growth track, and we're starting to see those efforts produce results. One of the most important tasks was to improve margins, and recent results show Lululemon accomplishing its objective in spades. Changes to the supply chain and inventory management helped adjusted gross margin reach 52.2% in the third quarter.
Management is hard set on growing the company to $4 billion in revenue by 2020. This involves growing historically small contributors to the top line, such as men's, international, and the digital business. As you'll read below, each of these are progressing nicely for shareholders.
Digital business accelerated in the quarter
Online, we saw a significant acceleration this quarter, with constant dollar comps up 25%, fueled by double-digit increases in traffic, transactions and delivering our best conversion this year.
The future of retail is shifting online, and Lululemon has made great strides in its digital plans this year. The website has been totally revamped with fresh photography and enhanced navigation that allows for better discovery by customers. This digital strategy will be particularly helpful in Lululemon's fast growing Asia business where Chinese consumers are more accustomed than Americans to shopping with their smartphones and online.
Recent innovations in the women's category are paying off
Reflecting our unparalleled leadership in women's pants, in Q3, we launched our newest fabric innovation, Everlux. Incredibly well-received by guests, it created a halo for our women's pants category, which comped up an impressive 24% in Q3.
Pants is the bread-and-butter of Lululemon's business, generating some of the best margins out of all categories, so it's always important to see this category perform well.
Lululemon really stepped to the front in innovation in 2017. In addition to Everlux, the Enlite sports bra -- released earlier this year -- has performed very well in a tops category that has historically been weak for Lululemon. Management mentioned there's more innovation to come in sports bras next year to keep the momentum going.
Men loved their new pants, too
On the men's side, we saw 21% increase in new male guests transacting with us this quarter.
Growing the men's business to $1 billion is an important part of management's growth plan, and the company seems to be on track to achieve that goal. Lululemon released two new styles of its best-selling men's ABC pants, as well as launched its first ever marketing campaign aimed squarely at men. These efforts helped drive 26% comparable sales year over year in the men's pants category. The broader bottoms category for men is an important area for Lululemon because it's usually the introductory product to the brand for male guests.
Management also cited strong performance in outerwear and jackets as benefiting both men's and women's categories. They see this as an opportunity end the year on a high note.
Lululemon has found a second home in China
Our international growth pillar continues to reflect one of our most significant long-term opportunities. While at the beginning of this journey, the market growth across Asia was nearly 100% in Q3, while China itself grew over 450%.
The Lululemon brand continues to resonate in Asia. China is a region particularly well suited to Lululemon with 450 million millennials and a government implementing a health plan to get people to live a more active lifestyle, which plays right into the company's hands.
Management expects international revenue to generate $1 billion by 2020. Most of that will be weighted in China and the digital side of the business, which plays into China's booming e-commerce market.
Black Friday was terrific for Lululemon
In North America, we're opening 22 seasonal stores nimbly meeting our guests where they are. And as the holiday season kicked off, we experienced our highest traffic and largest revenue day ever on Black Friday and on Cyber Monday, our largest day ever of online sales.
Record traffic and revenue during the busy Thanksgiving weekend is a really good sign for heading into the final stretch of the holiday period. Based on better than expected performance, management raised fiscal 2017 guidance. They are now calling for revenue in the range of $2.59 billion to $2.605 billion, and adjusted (non-GAAP) earnings per share in the range of $2.45 to $2.48. This would represent growth over fiscal 2016 of about 13% for revenue and 15% for earnings.
A strong showing during Thanksgiving has many retailers feeling optimistic about their prospects for the last weeks of 2017. Lululemon is no exception, and most importantly, the progress seen by its growth pillars should have long-term investors excited.