Today's stock market
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Tech continued its recent strong performance. After gaining 6.8% in May, the Technology Select Sector SPDR ETF (NYSEMKT:XLK) added another 1.7% today. Utility stocks fell; the Utilities Select SPDR ETF (NYSEMKT:XLU) dropped 1.6%.
As for individual stocks, lululemon athletica (NASDAQ:LULU) soared after the company announced strong Q1 sales, and shares of Costco Wholesale (NASDAQ:COST) were mostly unchanged following its earnings report.
Lululemon reports blow-out quarter
Yoga-apparel retailer Lululemon pleased investors with a first-quarter report that showcased the company's strong momentum, pushing shares up 16.3%. Revenue increased 25% to $650 million and earnings per share came in at $0.55, up 72% from adjusted EPS of $0.32 in Q1 last year. Three months ago the company had guided to revenue between $612 million and $617 million and EPS of $0.44 to $0.46.
The details behind sales and profit gains were impressive. Comparable sales increased 19% in constant currency, with comps in physical stores growing 6%. Comparable sales through the company's e-commerce channel grew 60% in constant dollars, after having posted 42% growth last quarter. Gross margin was 53.1%, which was 2.7 percentage points higher than adjusted gross margin in Q1 last year. Operating margin increased 4 percentage points.
Looking forward, Lululemon increased its guidance for full-year revenue about 2% to a range of $3.04 billion to $3.075 billion and bumped up EPS guidance by $0.10 to $3.10-$3.18 for the year.
That a premium brand like Lululemon could raise its gross margin by almost 3 percentage points is a surprising accomplishment, and demonstrates more than any other metric the strength of demand for its products and excellent execution by the company in both physical and online channels.
Costco grows sales, sees margin pressure
Costco Wholesale reported fiscal third-quarter results that beat expectations on the top and bottom lines, but the stock barely moved, closing down 0.6%. Revenue rose 12.1% to $32.36 billion and earnings per share jumped 6.9% to $1.70. Wall Street was expecting the company to earn $1.69 per share on revenue of $31.84 billion.
Excluding gas inflation and currency movements, comparable sales grew 7% for the total company and 7.7% in the U.S. E-commerce sales were strong, growing 35.5%. Membership fees grew 14.4%, with a little over half the gain being due to a fee increase last year.
Gross margin as reported declined 46 basis points to 11.05%, but fell only 28 basis points after subtracting the effect of gas inflation. Costco said rising freight cost was a contributor, with the company choosing not to pass on all the cost impact in order to increase competitiveness.
Going forward, Costco gave some insight into what it is planning to do with tax savings. Last year's tax rate was 35.5%, excluding a one-time benefit, and the company expects this year's rate to be about 28%. Costco will use some of the savings to increase the starting hourly wage by $1.00 and wages for other hourly employees by $0.25 to $0.50. Another portion will be invested in the business, including pricing, meaning the possibility of further declines in gross margin. And finally, some of the tax savings will be allowed to fall to the bottom line.
Investors already anticipated strong sales since the company reports sales data monthly, but the margin decline might have been a small disappointment. Costco's business remains strong, however, and the company is certainly one of the winners in today's challenging retail environment.