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What Lululemon Wants Investors to Know

By Demitri Kalogeropoulos - Dec 15, 2018 at 4:32PM

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Highlights from the apparel specialist's third-quarter earnings report.

Lululemon athletica (LULU 5.20%) just extended an impressive retailing streak: For the third straight quarter, the sports apparel specialist blew past management's growth forecast even as its profit margin climbed toward a record high.

CEO Calvin McDonald (who just concluded his first quarter in that leadership position) and his executive team held a conference call with Wall Street analysts to discuss how those results fit in with lululemon's long-term expansion plans. Below are a few highlights from that chat.

A woman holding a yoga pose.

Image source: Getty Images.

Getting the job done

"Our teams delivered another outstanding performance, posting strong increases across guest engagement, traffic and conversion. And, importantly, we also posted product margin expansion well above expectations." – COO Stuart Haselden

It was a strong quarter across the board, with solid results on the top and bottom lines. Lululemon posted a 18% sales increase, with a 6% jump at its physical locations and a 44% increase online. These gains translated into sales of $748 million, which surpassed management's forecast range of $720 million to $730 million.

Executives credited a few operational wins for helping drive sales higher, including better conversion rates online and improved marketing. The biggest factor, though, was lululemon's innovative product releases. These launches resonated well with its core demographic, but also allowed the company to expand into other arenas like outerwear and menswear. "Newness and technical innovation are resonating with our guests," Haselden explained, "while we are also seeing success as we leverage our core franchises."

Digital selling channel

"The traffic to our site grew over 35% in Q3, while conversion increased in the high single digits. Our expanded capabilities in digital marketing and data analytics are enabling these important traffic and conversion increases that we've been seeing all year." – Haselden

Lululemon's digital sales channel now provides 25% of its business, a threshold it had targeted reaching by 2020. The retailer found successes in building its email list, and then convincing a high proportion of those potential customers to shop at its website or in its physical locations.

The retailer had no difficulty charging full price for most of its products, either, so gross profit margin expanded by over 2 percentage points to 54% of sales. That boost helped fund increased spending on growth initiatives even as operating profitability rose to 18.2% of sales from 17.4% a year earlier.

More gains ahead

"We expect gross margin to increase by approximately 50 to 100 basis points versus Q4 of last year. Although we are anniversarying strong increases in product margins, we are still focused on further gross margin expansion through incremental reduction in average unit costs, driven by ongoing supply chain initiatives and scale efficiencies." – CFO Patrick Guido

Management predicted another profitability boost in the competitive holiday quarter, although gains are projected to be smaller than in recent periods. For some longer-term perspective, executives noted that product profit margins have improved by over 7 full percentage points since 2015 thanks to the combination of innovative launches, cost cuts, and investments in the supply chain and distribution network. Management said further profitability gains should be coming over the next couple of years.

As for its wider growth ambitions, lululemon is on track to meet or exceed its 2020 goal of reaching $4 billion of annual revenue, given that sales are on pace to land at around $3.2 billion for 2018. Executives are targeting a much larger base over time, with help from its push into international markets and new product categories. The good news is lululemon's early successes with women's and men's outwear suggest that there's plenty of room for the brand to move into related clothing niches in 2019 and beyond.

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