lululemon athletica (LULU 1.74%) recently treated investors to a third consecutive sales-outlook upgrade in 2019, after a banner quarter. The sports apparel specialist enjoyed a 23% revenue spike last quarter, which trounced the target that management had issued just a few months ago.
In a conference call with Wall Street analysts, CEO Calvin McDonald and his team broke down that market-thumping result while providing details about the brightening outlook for the company's holiday season and early 2020. Let's look at highlights from that presentation.
Image source: Getty Images.
Leading the way with innovation
Guests responded well to our product offering, which we continue to refresh and diversify. Momentum continues in our pant category in both men's and women's. ... [I]n men's, I'm proud that we increased our revenue 38% this quarter, which is the largest increase of the year.
-- McDonald
Lululemon's head-turning sales increase marked the third straight time that it surpassed management's quarterly outlook this year. The growth was powered by several successful initiatives, including a stepped-up launch schedule for new stores ahead of the holiday season and booming e-commerce sales. But the best news for the consumer business is that its selling strength is showing up both in its core demographic and among new shoppers and product categories.
Executives highlighted robust demand for outerwear and strong results in the men's segment, which grew at its fastest pace so far in 2019. These wins support their claim about there being ample growth left to capture, both in mature markets like the U.S., and in new geographies and product niches.
Still gaining efficiency
The gross profit rate increased 70 basis points versus gross margin last year ... . We remain pleased with the product margin strength we continue to realize on top of the strong gains over the last several years.
-- CFO Patrick Guido
Lululemon's gross profit margin has improved by 7 full percentage points since 2015, but the company isn't done pushing this key metric higher. Thanks to its high-margin e-commerce sales, robust customer traffic, and popular product innovations this quarter, gross margin inched higher despite extra shipping and tariff expenses. This win combined with the booming sales growth to lift operating income to 19.2% of sales, compared with last year's 18.2% operating margin.
Looking ahead
I also want to mention how our momentum has extended into quarter four with record-setting days over the Thanksgiving weekend and into Cyber Monday, as guests responded well to our range of product offerings.
-- McDonald
The company sees a few financial challenges impacting results over the next few months, particularly with respect to tariff costs and the related supply chain cost increase. However, Lululemon is expecting robust sales and earnings growth in the fiscal fourth quarter, and that confidence was bolstered by the record-breaking sales the chain achieved during the first week of peak holiday shopping.
Looking further out, investors are excited about the potential for higher sales in niches like men's and footwear, and in relatively untapped markets in Europe and Asia. More wins here should power robust earnings growth, too, as Lululemon expects gross profit margin to continue improving on an annual basis at least through fiscal 2023.
