Lululemon (LULU 1.70%) is scheduled to report fiscal third-quarter earnings on Dec. 9. The company is experiencing robust revenue growth as world economies reopen and it sustains strong online sales.
Most of its physical stores are now open, and they are supplementing an online business that surged at the pandemic onset. The combination is providing a powerful accelerator to sales. Indeed, the primary challenge heading into its holiday season is whether it can secure enough supply to fulfill the insatiable customer demand for its products.
Demand outpacing supply is usually a good problem to have
Revenue increased by 61% in Lulu's second quarter to reach $1.5 billion. While revenue grew in its North America and international segments, the growth was more profound internationally at 43% versus 26%. The company is moving to gain popularity overseas by planning to open 35 to 40 new stores this year. Lululemon had 534 brick-and-mortar stores at the end of Q2.
Perhaps the most difficult challenge for Lululemon to maintain robust revenue growth for the rest of its fiscal year is stocking its stores and warehouses with enough supply. CFO Meghan Frank talked about the challenge in the company's second-quarter conference call:
As we've mentioned, we are seeing some delayed inventory receipts due to issues of the ports and also the recent COVID-related closures of certain factories in Southern Vietnam. Our supply chain and product teams are working diligently to mitigate these risks by shifting production out of Vietnam, where possible with our vendors who operate in multiple countries, prioritizing production to ensure key fall holiday styles are produced first and strategically increasing our use of airfreight.
At the end of Q2, Lululemon's inventory level was 17% higher than last year, but below the target 25% to 30% increase the company was expecting. A lighter inventory level may slow down revenue growth in Q3, but it's not likely to stop or reverse the increase. More importantly, investors will want to see Lululemon build enough inventory for the higher-demand holiday Q4.
Lululemon is a stock market favorite
Analysts on Wall Street expect Lululemon to report revenue of $1.4 billion in Q3 and earnings per share (EPS) of $1.41. If the company meets the EPS estimate, it would be a 21.5% increase from the same quarter last year. Lululemon has done an excellent job growing sales and earnings over the previous decade -- increasing 20% and 18.1%, respectively.
It's no surprise, then, that Lululemon stock is a market favorite, up 33% in 2021. The company has achieved impressive EPS growth by maintaining operating profit margins close to 20% for 10 years. The healthy margins could give it some wiggle room to pay higher prices to ensure sufficient supply for the holiday season. Management has skillfully dealt with challenges arising from the pandemic, giving investors reason it will handle supply challenges with success. Still, investors will want to keep a close eye on the situation.