Shares of lululemon athletica (LULU -1.03%) jumped about 15% the day after the company's fiscal fourth-quarter earnings report, which showed continued momentum through the holiday season quarter ending in early February. Lululemon blew past management's already high expectations, with revenue coming in at $1.2 billion, up 26% year over year. Adjusted earnings per share reached $1.83, representing growth of 38% year over year.
It's clear based on the stock's post-earnings spike that market participants are having a difficult time keeping up with Lululemon's growth. We'll look at four specific areas that have investors excited about the future.
1. Margins still expanding
If there is one financial metric that speaks to how well Lululemon is performing, it's the continued improvement in margins. Gross margin hit 57.3% in the fiscal fourth quarter, up from 56.2% in the year-ago quarter. This puts the company well ahead of schedule for reaching its goal of a 55% gross margin by 2020. The recent uptick was driven by lower unit costs and higher full-price sell-through, which led to higher product margin overall.
Lower product costs and robust demand, along with strong e-commerce growth of 37% in the fourth quarter, are creating the perfect scenario for Lululemon to improve margins and deliver impressive growth rates on the bottom line.
What's more, management still sees room for further margin expansion, stemming primarily from digital growth and ongoing improvements to the supply chain and infrastructure. The company's guidance calls for moderate improvement in gross margin in the short term. This is noteworthy as it comes on top of the already-strong margins achieved last year.
2. Men's growth taking off
Of course, fundamentally, the growth story continues to center on product quality and innovation. The men's business is much smaller but is growing faster than the women's business. Lululemon cited high demand in bottoms for driving new guests to the brand, particularly men. Total comparable-store sales increased by 16% year over year in the fourth quarter, driven by men's comparable sales growth of 28%, which was higher than women's comps of 21% year over year.
Last year, Lululemon launched outerwear for men, which sold very well, and management believes the outerwear category could grow into a much larger sales contributor for the company.
There's still a massive opportunity in the men's business, which represents just 20% of total revenue. COO Stuart Haselden sees a long runway of growth in the men's category over the long term: "We really believe that Lululemon can be a dual-gender brand and that our men's business can ultimately be as big as our women's."
Check out the latest earnings call transcript for lululemon athletica.
3. International is a massive opportunity
Overall, the most significant growth driver for the company going forward will be international expansion. Management plans to accelerate store openings, and most of those stores will be opened in international markets, notably Asia and Europe.
Both Asia and Europe experienced robust sales growth in the fourth quarter of 70% and 60% year over year, respectively, with Europe sales accelerating in the quarter.
4. New growth avenues opening up
Finally, Lululemon reported early success when testing two new services, its new loyalty program and Selfcare. CEO Calvin McDonald said, "We continue to be excited by the potential that our loyalty program holds for our brand. Our first members-only event in Edmonton was a huge success, and we are thrilled with the overall response of the program in this market."
Additionally, Lululemon is having success expanding into skincare products, such as deodorant, face moisturizer, and shampoo. These are products customers have demanded from Lululemon for years, and McDonald believes there's a big opportunity in them: "We remain excited about the Selfcare, given the strong guest response to our tests. We believe this category holds great opportunity for us and is a natural extension for our brand."
All of this adds up to an enormous opportunity for a still relatively small athletic-wear brand to grow into one of the major brands in the industry. In terms of future revenue and earnings growth, Lululemon looks like one of the best long-term growth stories in the retail industry. That's likely why investors continue to send the share price higher even with high expectations already built in to the stock's valuation.