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lululemon athletica Earnings: What to Watch

By Demitri Kalogeropoulos - Aug 27, 2018 at 9:30AM

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Investors have a few big questions heading into the retalier's second-quarter report.

Retailers don't usually announce big improvements to their fiscal year outlook after the first quarter. There's so much of the year left to play out, after all, and many things can go wrong between the spring and winter selling months. As a result, full-year predictions often hold steady until at least the second quarter.

lululemon athletica (LULU 1.22%) took a different approach this year. The yoga apparel specialist enjoyed such strong demand in the spring -- both in its stores and online -- that management hiked its 2018 guidance on both the top and bottom lines in early June. The company said many of the encouraging trends that lifted last quarter's results were carrying over into the next sales period, too. Thus, investors' expectations are high for the retailer's upcoming report, set to publish on Thursday, Aug. 30.

A woman holding a yoga pose on a dock with a lake in the background and the sun shining brightly

Image source: Getty Images.

Stretching for sales

Executives had expected first-quarter growth to hold roughly even with the prior quarter at about 11%. Instead, Lululemon posted a 19% spike in comparable-store sales. The growth included an encouraging 8% increase in sales at physical stores but was mainly driven by a 60% jump in its e-commerce segment.

Management noted back in June that these head-turning metrics benefited from comparison to an unusually weak prior-year period. Comps declined a year earlier, for example, and the digital sales channel was flat.

However, executives insisted that the gains were coming from broad-based positive momentum supported by hit product releases, better customer traffic, and improved conversion rates online. That's why Lululemon investors are looking for sales growth to slow slightly in this report while still reflecting impressive market-share gains.

Profitability

Many retailers, including Target and Walmart, are being forced to trade higher e-commerce sales for lower profitability. It's a more competitive niche, after all, and many key selling advantages don't translate from the physical world into the online channel.

Lululemon is bucking that trend, though. In fact, its e-commerce segment is pushing its profit margin to new highs. Last quarter's 60% spike in the digital niche helped lift profit margin up to 53% of sales from 50% a year earlier. "We're a premium brand," executives explained at the time, "but that's still a phenomenal performance."

LULU Operating Margin (TTM) Chart

LULU Operating Margin (TTM) data by YCharts.

Investors are looking for this positive momentum to continue lifting results as the company steps up its new product releases ahead of the key holiday shopping season. Ideally, gains here will more than offset increased spending on the digital infrastructure to keep operating margin climbing. That metric is on pace to cross 20% of sales for the first time since 2015.

Welcome the new boss

Calvin McDonald will participate in his first quarterly earnings report as CEO with barely a week of experience in his new position. In contrast to many management changes, McDonald isn't faced with major problems like slumping sales or collapsing profitability. Instead, his biggest challenge will be to protect and extend the positive momentum that Lululemon has been enjoying over the last few quarters.

That aim likely means investors won't be hearing about any dramatic strategic shifts on Thursday, so long as the retailer remains on track to pass $3 billion of annual sales in 2018 on the way toward a goal of $4 billion in annual revenue by fiscal 2020.

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