Investors had high expectations for lululemon atheletica's (LULU -0.41%) holiday quarter results. Even as the broader sports apparel industry slowed, the yoga clothing specialist entered the period with solid momentum. And management added to that optimism by boosting its 2017 sales and profit outlook in early January.
This week, the retailer surpassed that upgraded guidance and gave investors even more reasons to feel optimistic about the business. Let's take a closer look at what set Lululemon apart in its recent retailing wins.
Image source: Getty Images.
Traffic-led growth
Sales growth was surprisingly strong over the holidays. Revenue shot up by 18% to $929 million, which easily exceeded the top of management's early January forecast range. Better still, that success was driven by customer traffic gains across Lululemon's key sales channels. Extra shopper visits powered a 2% comps increase in its physical locations while a double-digit traffic boost online translated into a 44% jump in e-commerce sales.
Combining the two channels, overall comps improved by 11% to beat guidance and mark a significant acceleration over the prior quarter's 7% increase. Lululemon executives credited strong execution around marketing, merchandising, and online conversions. "We believe much of our momentum is the result of our omnichannel initiatives, as well as our investments in digital and brand marketing," they said in the quarterly conference call.
Stellar profitability
Profitability took a big step up toward the record high it set in 2011 before quality-control issues sent sales growth plunging. Those struggles are firmly in the rearview mirror now, though. Gross profit margin rose 2 percentage points over the holidays and gained nearly the same amount for the full year to reach 53.1% of sales.
LULU Gross Profit Margin (TTM) data by YCharts.
Lululemon achieved higher operating profit, too, even though the retailer invested heavily in its online sales channel. Operating margin touched 27.6% of sales compared to 24.9% a year ago. As a result, earnings per share, after adjusting for one-time tax charges, jumped 33% to $1.33.
Management sees this positive trend continuing for at least the next few quarters, especially as sales shift toward higher-margin e-commerce deliveries.
A bright 2018
Likely the best news for investors in this report had to do with Lululemon's outlook for the new fiscal year. Executives forecast comps in the low-double-digit range for the first quarter, powered by the accelerating customer traffic momentum they've seen over the last few weeks.
It will get harder to mark big improvements over the prior-year period from there, but the retailer still expects overall comps to rise in the mid-to-high single-digit range in 2018, or roughly consistent with this past year's 7% uptick.
A flexible store format approach that includes both bigger locations and seasonal "pop-up" spots should also contribute to sales growth of about 15% for the year. That would put Lululemon's annual revenue base around $3 billion and give the company a good shot at approaching its long-term goal of $4 billion in annual sales by 2020.
Following the abrupt departure of its CEO in early February, the company is now searching for a new leader, which might involve a difficult transition period. But the good news is the incoming chief executive will take the reins under the best possible conditions. With sales growth accelerating and profitability expanding, Lululemon is in a far better position than it was back in 2014, when Laurent Potdevin took over the retailer's top executive spot.
