Lululemon athletica's (LULU 1.43%) habit of trouncing Wall Street's expectations helped to push shares higher heading into its first-quarter earnings report. Most investors who follow the stock predicted the apparel specialist would beat management's growth targets for the fifth straight quarter, yet lululemon outpaced even those cheery forecasts.
In a conference call with analysts, CEO Calvin McDonald and his team broke down the key factors behind the chain's improving results. They also detailed the trends -- both positive and negative -- that they see impacting the rest of the fiscal year.
Below are a few highlights from that presentation.
Image source: Getty Images.
No slowdown to start 2019
While it's been reported there is some recent softening in the apparel space, there is no doubt that 2019 is off to a great start for us. We are building upon the momentum of the past year and instilling confidence in our long-term growth plans.
-- McDonald
Investors had two compelling reasons to expect softer results this quarter. First, lululemon was going up against a prior-year period that included 20% higher comparable-store sales and a 60% spike in the e-commerce channel. Second, industry peers have been showing slower growth lately. Nike, for example, recently reported its first deceleration in nearly a year in the core U.S. market.
Lululemon still managed to trounce the growth targets that executives issued in late March, with sales rising 20% to $782 million. Executives said the outperformance was broad based, as demand rose across its men's and women's categories, both in stores and online and in each of its geographic markets.
Winning online
Our digital business grew 35%, which represents a more than doubling of the business over the last two years.
-- McDonald
The e-commerce segment grew 35% -- on top of last year's 60% increase. That spike was supported by huge investments in the channel that boosted the level of available products and made quick in-store pickup accessible across most of its selling footprint.
Guests responded by flocking to lululemon's app and website, with online traffic rising 41% year over year compared to an 8% improvement in in-store traffic. "Our strength and unique position," McDonald's explained, "is to activate great product across our omni-guest experiences, leveraging our stores, community, and events."
Short-term headwinds
We expect gross margin to be flat to up modestly versus Q2 of last year. Our guidance reflects a modest impact from potential new tariffs and also additional cost to airfreight product in order to avoid anticipated port congestion in the Asia region, due to the pending tariff increases.
-- CFO Patrick Guido
For the second consecutive year, lululemon raised its annual outlook to a range of $3.73 billion to $3.77 billion, following its first-quarter results. Yet the higher sales forecast still trailed the $3.8 billion that Wall Street has been predicting, and the new profit target also comes up short.
The revenue gap is likely management's determination to be a bit conservative given that so much of the fiscal year is yet to come. As for profits, executives said their forecast predicts rising costs tied to the introduction of new tariffs. Not only will these penalties raise costs, but they'll also generate disruption in shipping lanes as retailers race to import products ahead of the tariff deadline. Lululemon plans to navigate this disruption in part by relying on air freight, which will raise costs over the next few quarters.
Looking further out, management sees the full year marking a strong start to the five-year growth plan, which calls for the doubling of its men's and digital business and the quadrupling of its international sales between now and 2023.
