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Lululemon Earnings: What to Watch

By Demitri Kalogeropoulos - Mar 22, 2020 at 1:00PM

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The apparel giant will update investors on its global operating trends in just a few days.

lululemon athletica (LULU 2.15%) investors have every reason to expect a significant business impact from the spread of coronavirus (COVID-19) and the related efforts to contain the outbreak. The athletic apparel producer over the weekend joined peers including Nike and Under Armour in temporarily closing most of its store base.

That situation all but ensures that management will predict a sharp sales decline ahead when it posts earnings results on Thursday, March 26. However, Lululemon might have good news to report about sales trends in the fiscal quarter that just closed, and with respect to its booming digital business.

Let's take a closer look.

Yoga students holding a pose.

Image source: Getty Images.

Growth wins

Investors had no reason to worry about growth trends through the first three quarters of fiscal 2019. In fact, Lululemon trounced sales targets in each of those reports, including by posting a 23% revenue boost in the third quarter. The chain enjoyed robust demand in its core women's demographic, but also in new geographies and new product niches like outerwear and men's apparel.

These wins convinced CEO Calvin McDonald and his team to raise their outlook in late December to call for sales of $3.9 billion for the year as comparable-store sales improve in the mid-teen percentage range. The company subsequently saw a disruption in its modest China-based business, but investors are still optimistic about backward-looking trends. Wall Street analysts are expecting sales to come in just above management's outlook, with 2019 revenue reaching $3.96 billion, or 20% above the prior year's haul.

Healthy profit margins

The profitability outlook is more mixed. Lululemon has warned investors that margins could be hurt by the increasing tariff and transportation costs associated with the trade war with China. The pressure didn't reduce gross profit margin last quarter, and instead that metric ticked higher even after rising by 7 full percentage points since 2015.

But shareholders could still see flat margins or a slight decline this quarter, especially as price-based competition heated up over the holiday season. In any case, look for operating income to be strong at nearly 20% of sales. Management's long-term outlook saw gross margins improving modestly at least through fiscal 2023, but that forecast will likely change with the fluid shift in coronavirus trends.

An unusually cloudy outlook

Lululemon likely won't issue a detailed outlook for fiscal 2020, given the unprecedented volatility in global sales trends today. Its entire store base is closed in North America and Europe and expected to be shut down at least through March. From there investors are likely to see continuing impacts from the global economic contraction.

If there's a silver lining to this story, it would be Lululemon's digital selling channel, which today is operating at full capacity. The consumer retailer already counts a large proportion of sales through that segment, and directly delivered products are often more profitable than sales booked at its stores.

Sure, the e-commerce channel can't absorb all the losses from cratering customer traffic trends. But Lululemon might note more strength in this niche that points to healthy shopper attitudes even as aggressive social distancing efforts take root in the U.S. and Europe.

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