Lululemon Athletica (LULU -1.26%) is enjoying solid momentum at the start of the holiday shopping season. In an earnings announcement last week and a subsequent conference call with investors, the athleisure retailer revealed strong demand trends and increasing profitability, even if growth slowed as compared to the prior quarter.
CEO Calvin McDonald and his team also boosted their fiscal year outlook for a third straight time in 2021.
Let's take a closer look at Lululemon's fiscal third-quarter results.
Image source: Getty Images.
Sales trends
Sales growth slowed dramatically when compared to the prior quarter, but that decline was almost entirely due to COVID-19 volatility. Revenue gains landed at 30%, or about half the 61% spike Lululemon noted in the second quarter. The increase edged past Wall Street's expectations.
On a two-year basis, which smooths out the impact of temporary store closures in 2020, sales are up a stellar 26% since Q3 of 2019. That's roughly the same compound annual growth rate that the chain enjoyed last quarter. For context, Lululemon had been growing at a roughly 19% rate before the pandemic struck. "We are pleased with our early holiday season performance," McDonald said, "and how the lululemon brand continues to resonate in markets around the world."
Profit trends
The company endured spiking expenses on everything from labor to shipping. In many cases, management splurged for air freight over ocean freight to ensure inventory made it to stores.
Yet profitability still rose thanks to the combination of sales growth and rising average prices. Gross profit margin jumped by 2 full percentage points compared to 2019 and adjusted operating margin edged up by 0.2 percentage points.
LULU Gross Profit Margin data by YCharts
Those wins allowed earnings to jump to $1.62 per share, beating most investors' forecasts. CFO Meghan Frank said the team was happy with the profit performance, especially when considering the "ongoing, industrywide supply chain issues we continue to navigate."
Looking ahead
Several of Lululemon's biggest sales weeks of the year lie ahead in the fiscal fourth quarter, and those supply chain issues add another layer of risk to the short-term outlook. COVID-19 outbreaks might threaten customer traffic volumes in a few geographies, too.
But management has seen enough early Q4 data that it feels comfortable raising its outlook for the third consecutive time. Sales will now land between $6.25 billion and $6.29 billion, up from the prior forecast range of $6.19 billion to $6.26 billion. By comparison, sales were $4.4 billion in 2020 and $4 billion in 2019.
It's a major win for shareholders to see that annual sales level rise by over 50% in just two years. But investors are hoping the Lululemon growth story is just getting started. With new geographies to target, additional demographics like menswear, and attractive niches on the radar both inside and outside of the athleisure category, the chain has an inside shot at boosting sales by nearly 20% annually through 2023.
Management's five-year plan pairs that market-beating growth with steadily rising profitability, which should support excellent shareholder returns. And that's especially true given that fiscal 2021 is on track to blow past those annual operating goals.
