Revenue grew 88% year over year to reach $1.23 billion. Adjusted earnings per share were $1.16, beating the street's estimate of $0.91 and accelerating to a growth rate of 404% compared to the year-ago quarter.
While Lululemon benefited from an easy year-over-year comparison, the brand is experiencing stronger momentum in 2021 than it did in 2019, before the pandemic. Lululemon's revenue has increased 25% on a two-year annualized basis, up from a 19% compounded rate when measured against results going back to the first quarter of fiscal 2018.
CEO Calvin McDonald said, "We are very early in our growth story, and we are well positioned for the post-pandemic world." Let's look at three reasons why Lululemon's growth is accelerating, and what investors should expect out of this growth stock.
Store traffic is back
Revenue from company-operated stores jumped 106% year over year to $536.6 million. Store productivity exceeded management's expectations coming in at 88% of 2019 levels. It's impressive that growth was driven across all product categories, regions, and sales channels.
Happy employees really do make happy customers. McDonald credited the decision to offer pay protection to employees a year ago for driving higher store productivity. "This meant we could reopen stores quickly, and this agile and dedicated team has allowed us to continue to support the increased traffic momentum in the stores that we are experiencing now."
Lululemon plans to open 45 to 55 new company-operated stores this year, up from previous guidance for 40 to 50. Most of these will be opened in international markets where Lululemon continues to see rapid sales growth.
Lululemon's results were lopsided during the pandemic with virtually all its growth coming from e-commerce. Digital sales comprised 52% of total revenue in fiscal 2020, but even with store traffic picking up, Lululemon is still experiencing incredible momentum in the digital channel. In this latest quarter, direct-to-consumer revenue surged 55% year over year to $545.1 million, or a currency-neutral growth rate of 50%.
During the earnings call, CFO Meghan Frank said, "Traffic was driven by both new and existing guests, and conversion continues to benefit from positive guest response to the enhancements we've been making to our e-com sites and mobile app."
While women's products made up 69% of total revenue in fiscal 2020, management has been investing to expand the men's business as part of its long-term strategy. Men's growth underperformed during the pandemic, but this category is returning strong in 2021.
Men's revenue grew 27% on a two-year compounded basis, outpacing women's growth of 23%. Management reported strength in the On The Move assortment, which has been a key gateway to the brand for male guests.
There are plenty of other opportunities to expand this category with new products, and management sees the potential in broadening the On The Move assortment for women too.
Lululemon also recently launched the Like New resale program, which allows customers to trade-in or resell their used workout clothes.
What's wrong with the stock?
Guidance calls for fiscal second quarter revenue to be between $1.30 billion to $1.33 billion, which represents a two-year compounded growth rate of 21% to 23%. This shows a strong recovery under way after revenue was up just 11% in fiscal 2020.
So why is the stock stuck in a rut, down 5% year to date? Lululemon's price-to-sales ratio has stretched 45% higher over the last three years, making the shares that much more expensive to investors.
However, Lululemon should be able to grow into that valuation and deliver a market-beating return to investors over the long term. Management continues to invest in supply chain efficiency, which could push the company's profit margin up. Analysts expect Lululemon to finish the year with adjusted earnings per share of $6.75, a year-over-year increase of 44%, before increasing to $8.26, or 22%, next year.
All said, I wouldn't bet against this rising consumer discretionary brand, especially as it prepares to launch its highly anticipated footwear line in the near future.