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Can Lululemon Keep Up the Positive Momentum?

By Demitri Kalogeropoulos - Updated Jun 10, 2019 at 3:01PM

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Investors have some big questions ahead of the sports apparel specialist's upcoming earnings report.

Many worrying factors might cause a company to issue a new long-term outlook, but Lululemon Athletica (LULU 2.15%) recently did so for the best possible reasons. The yoga-inspired apparel chain is tracking so far ahead of 2020 growth targets that they hold little significance today. Thus, the company introduced new 2023 goals at its recent shareholder meeting that call for far higher sales and earnings as the company expands internationally and moves into new product categories like men's apparel, running, and accessories.

Investors will get their first chance to evaluate those targets against management's actual numbers when the chain reports fiscal first-quarter results on Wednesday, June 12. Here's a look at what shareholders might expect to see in that announcement.

A woman holds a Triangle yoga pose in front of a rising sun.

Image source: Getty Images.

Stretching to new highs

Lululemon's growth thesis relies on a healthy sports apparel industry, booming digital sales, and continued success winning market share in the yoga niche and in complementary product areas. Its 16% comparable-sales spike last quarter was powered by each of these factors as the company parried new competitive threats from Nike and other rivals. Despite these challenges, Lululemon grew revenue by 27% after adjusting for currency exchange moves to more than $1.2 billion.

CEO Calvin McDonald and his team projected back in late March that the positive momentum would continue into fiscal 2019, with comps rising in the low double-digit range as sales landed between $740 million and $750 million. Look for Lululemon's digital channel, which accounts for more than 25% of the business (and is uber profitable), to lead the way.

Making more cash

The retailer's profit posture is even more important for investors to watch than usual. That's because management has consistently predicted that gross margin will continue expanding even though the metric has already risen by seven percentage points since 2015. This single number tells investors a lot about the strength of the business, including how well customers are responding to new product releases and how loyal they are to Lululemon's brand. The chain also needs robust margins to help support what could be an expensive move into new international markets over the next few years.

Operating margin last year rose to 21.5% of sales from 19%, and investors are looking for similarly strong gains to show up in this report and in Lululemon's full 2020 fiscal year.

Updating the outlook

Given the soaring share price lately, Wall Street appears to be betting that Lululemon will lift its annual outlook on Wednesday or at least announce results that imply it will end up surpassing those goals. As it stands today, that outlook calls for revenue to rise by about 12% to $3.7 billion as earnings land between $4.48 per share and $4.55 per share. Most investors who follow the stock are more bullish, and average estimates have the chain reaching sales of $3.8 billion and earnings of $4.63 per share.

That optimistic outlook means there will be intense focus on what McDonald and his team say about the recent demand trends on Wednesday. Still, even a surprisingly sluggish result isn't likely to knock management off a long-term outlook that predicts double-digit sales growth and profitability expansion in each of the next five fiscal years.

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