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lululemon athletica Kicks Its Skeptics Off the Mat

By Dan Caplinger - Aug 31, 2018 at 8:17AM

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Find out where the yoga apparel retailer is having the most success.

lululemon athletica (LULU 1.04%) has come a long way in a few short years. After an amazing start in pioneering the specialty athletic apparel business with its emphasis on yoga, Lululemon looked like it gave all of its promise away when it succumbed to quality control problems. The recovery has been long and difficult, but now, Lululemon is finding new ways to move forward, and its efforts have paid off with soaring share prices and new record highs for the stock.

Coming into Thursday's fiscal second-quarter financial report, Lululemon investors had high hopes that the yoga apparel specialist would continue its strong momentum from recent quarters. The company's results were impressive, and some of its most promising areas show the growth opportunities that the company has the most confidence in.

lululemon storefront under a dome-shaped villa with people walking in front.

Image source: Lululemon.

How Lululemon fared

Lululemon's fiscal second-quarter results were rock solid. Sales climbed to $724 million, matching last quarter's 25% growth rate and crushing the 15% in revenue growth that most of those following the stock had expected to see. Net income almost doubled, to $95.8 million, and earnings of $0.71 per share were far ahead of the consensus forecast for just $0.49 per share on the bottom line.

Fundamentally, Lululemon continued to keep up its impressive pace. Total comparable sales jumped 20%, powered largely by a 48% rise in revenue from its direct-to-consumer business. Even the company's brick-and-mortar stores remained strong, with a 10% comparable-store sales gain that accelerated from the fiscal first-quarter's 8% rate of growth. The impact of foreign-currency fluctuations was mildly positive, but it only added a single percentage point to most of Lululemon's key metrics.

One area that's really helped the company lately has been its ability to keep costs under control, and that showed again during the second quarter. Gross margin was higher by more than 3 1/2 percentage points, coming in at 54.8%. Operating margin soared nearly 7 percentage points, to 18.5%, reflecting much slower increases in overhead expenses and other costs than Lululemon's top-line growth. Interestingly, taxes didn't really play a big role in the company's performance, as effective tax rates, as measured by pre-tax income, were roughly comparable with year-earlier figures.

As we saw last quarter, Lululemon has been far more deliberate in opening new locations. Just five new stores opened during the second quarter, and after accounting for one closure, Lululemon now has 415 locations, with a total of just over 1.3 million square feet of retail space.

New CEO Calvin McDonald had only a few comments to make in the press release. "I'm excited to work with the leadership team to build upon this considerable success," McDonald said. The CEO also pointed to the strength of the Lululemon brand in powering future gains.

What's ahead for Lululemon Athletica?

Lululemon has a long-term vision squarely in its sights. As COO Stuart Haselden noted, "This ongoing success positions us to achieve our 2020 goals and beyond." The executive attributed the company's performance to its educators and work teams across its global network.

Investors were pleased with the near-term projections that Lululemon made. The yoga retailer now believes that third-quarter revenue will come in at $720 million to $730 million, with comparable sales climbing at a percentage rate in the low teens. Earnings of $0.65 to $0.67 per share would be better than the forecasts that investors following the stock have made.

For the full year, Lululemon once again increased its overall guidance. Total revenue should come in between $3.185 billion to $3.235 billion, up about $145 million to $160 million from what the yoga apparel specialist had projected three months ago. An upgrade in earnings to a new range of $3.45 to $3.53 per share is fully $0.35 per share higher than what the company said to expect in its first-quarter report.

Lululemon investors celebrated the news, and the stock closed the after-hours session following the announcement with gains of nearly 9%. Even at those unprecedented price levels, Lululemon's fundamental business prospects invite further growth from the company, and shareholders are hopeful that they'll get to keep participating in the yoga specialist's recovery well into the future.

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