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Lululemon Athletica's Earnings Show Solid Momentum Through Early February

By Demitri Kalogeropoulos - Mar 30, 2020 at 3:54PM

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The apparel specialist says it has plenty of cash to help it navigate the current pause in retailing resulting from the COVID-19 pandemic.

Investors were optimistic heading into lululemon athletica's (LULU -0.52%) fourth-quarter earnings report. While the yoga apparel specialist faced retail disruption in China, expectations were high following three straight quarters of surprisingly strong sales growth.

On Thursday, the company extended that streak to four, mainly thanks to support from its booming digital selling channel. CEO Calvin McDonald and his team also expressed confidence about the long-term growth outlook even as they declined to issue a detailed forecast for fiscal 2020.

Let's dive right in.

A woman holds a yoga pose.

Image source: Getty Images.

Strong sales gains

The fiscal fourth quarter, which ran through Feb. 2, was another blockbuster growth period. Revenue rose 20% overall, thanks to the combination of 9% higher sales at stores and a 41% spike in e-commerce. That performance allowed Lululemon to outperform management's outlook for the fourth consecutive time in fiscal 2019.

Sales landed at $4 billion for the year; executives had predicted $3.9 billion back in December. Most investors who follow the stock were expecting $3.96 billion in revenue for the full year. "2019 was a strong year for lululemon," McDonald said in a press release.

Earnings wins

The good news extended into the profit side of the ledger, with gross margin ticking up to 58% of sales from 57.3% a year ago. That increase was notable given pricing pressures from Chinese tariffs. Lululemon offset those challenges by launching popular products and selling more merchandise through its profitable online division. Gross margin has now improved for four consecutive years.

LULU Gross Profit Margin Chart

LULU Gross Profit Margin data by YCharts.

Operating margin improved at an even faster rate, rising 1.4 percentage points to 29.8% of sales. These gains contributed to a meaningful boost in overall profitability, as operating earnings jumped to $889 million, or 22.3% of sales in 2019, compared to $706 million, or 21.5% of sales a year ago.

A cloudy outlook

On the downside, Lululemon's short-term outlook was unusually murky. After the closing date of the fourth quarter, the company shut down most of its retailing locations in China and then followed that up with widespread temporary closures in Europe and the U.S. All of its Chinese locations have now reopened, but the abrupt shutdown currently in place across the U.S. and Europe has management feeling uncertain about predicting demand trends based on sales volumes the company is seeing at the moment. "Due to the impact that COVID-19 is having across the globe," executives said, "we are not providing guidance for fiscal 2020 at this time."

The consumer company promised to issue updates as the situation develops, but for now, investors can only assume that Lululemon will see significant sales pressures from the lack of retailing operations in two of its biggest markets at the start of fiscal 2020.

Somewhat mitigating that obvious challenge is its booming e-commerce business, which was responsible for 29% of global sales last year, up from 26% a year earlier. Considering Lululemon shoppers already frequently order through its website and shopping apps, the company could experience a more modest overall impact from social-distancing efforts in places like the U.S. and Europe. There will definitely be an impact on sales, but it could be short-lived if the most aggressive virus containment measures pass relatively quickly. It's still too soon to know what the long-term effects will be.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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