For the second quarter in a row, lululemon athletica (LULU +2.68%) shocked Wall Street pros by announcing surprisingly strong earnings results. Executives said three months ago that they saw signs of positive momentum building across the business, but actual second-quarter results blew past that aggressive outlook.
Management had even more optimistic comments to make about the retailer's latest operating trends in their quarterly conference call with investors. Let's take a look at a few highlights from that presentation.
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Robust growth
"We saw a broad-based acceleration in our business across an array of categories, channels and geographies. We had said on the Q1 call that our great results in that period were not simply a case of lapping week prior year comparisons, and our Q2 results continued the story, reflecting the success of our ongoing structural investments." -- Chief Operating Officer Stuart Haselden
If you focus only on the headline growth figure, it might seem like Lululemon's expansion pace is merely holding steady since comparable-store sales rose by about 20% in each of the last two quarters. In fact, the latest result translates into a significant growth uptick because comparisons with the prior year periods became much more difficult between the fiscal first and second quarters.
Lululemon enjoyed faster customer traffic gains in its stores this quarter, and that figure has now improved for five consecutive quarters. The online business posted sharp traffic gains too, which combined with a significant increase in conversion rates to lift revenue by a market crushing 60%.
Premium branding
"It's important for our investors to understand that we still see opportunity for margin expansion as we further invest in these already successful initiatives, including expanding our e-commerce business, segmenting our supply chain, reducing lead times and expanding our distribution network. We believe our margins can continue to expand into the future." -- Haselden
On the profit side of the business, everything that could have gone right this quarter, did. Pricing trends firmed up as the retailer scaled back on promotions and as new product introductions resonated with customers. And production costs fell, as did selling expenses.
LULU Operating Margin (TTM) data by YCharts
As a result, operating margin shot up to 18.5% of sales from 12.8% a year ago. Management believes they've still got a few levers to pull to keep this figure moving higher, too, including additional product launches and further improvements to the online selling channel. However, that growth will be more modest over the short term, executives warned, especially as they ramp up investments in things like data analytics and marketing in the third quarter in preparation for the key holiday shopping season.
Looking ahead
"For the full year 2018, we now expect revenue to be in the range of $3.185 billion to $3.235 billion. This is also based on a comparable-store sales percentage increase in the low teens on a constant-dollar basis." -- Chief Financial Officer Patrick Guido
Lululemon raised its full-year outlook for the second straight time and again management said that the momentum that lifted the latest quarter's results has continued into the current quarter. Robust traffic growth, combined with a packed pipeline of clothing and accessory introductions on the way, should support sales of roughly $3.2 billion for a 21% spike, year over year.
And, while still early, executives are already taking another look at their ambitious longer-term goals. They're on track to "meet or even exceed" their target of $4 billion of annual sales by 2020, Haselden said, with some of the biggest growth opportunities, including international markets, men's wear, and e-commerce, remaining relatively untapped so far.
