Investors had high expectations heading into Lululemon Athletica's (LULU -0.03%) fourth-quarter earnings report, and they weren't disappointed. Shares jumped after the company revealed strong customer traffic and earnings trends though late January. The rise of the omicron variant didn't halt its impressive growth momentum, and earnings took only a modest hit from inflation.
Let's take a closer look at the report and why it might mean improving returns for investors from here.
Image source: Getty Images.
The sales picture
Lululemon warned investors in mid-January that sales trends might look a little weaker over the holiday period due to the spike in COVID-19 cases that started in December 2021. As predicted, revenue landed at the low end of that previous outlook with sales rising 23% to reach $2.1 billion.
That result was still enough to push the athleisure apparel retailer to $6.3 billion for the full 2021 year, translating into a 40% surge. The company entered the year targeting just $5.6 billion of annual sales, meaning it outpaced its original guidance by over 10%.
"We are proud that we passed the $6 billion [mark] in annual revenue milestone for the first time," CEO Calvin McDonald said in a press release. The company saw especially strong demand in digital sales, which jumped 16% on top of a 92% spike a year ago.
Paying up for air freight
The company wasn't immune to the inventory, cost, and supply-chain challenges that have pinched the retailing industry in recent months. The gross profit margin took a rare turn lower, mainly thanks to soaring transportation costs.
Management said in a conference call that they increasingly relied on air freight over the traditional container ship model to keep inventory flowing into stores. The move helped keep store shelves fully stocked but pressured gross profitability by five full percentage points.
The good news is that rising prices, more demand for premium products, and higher overall sales offset this slump. CFO Meghan Frank said, "We delivered solid performance while navigating supply-chain challenges and the impacts of COVID-19."
Looking to 2022
The company reported higher inventory heading out of the holiday season, which normally might be a warning sign for investors. Executives said this boost wasn't a consequence of weakening demand but instead reflected their strategy to be ready for another big year of sales growth.
Specifically, Lululemon is predicting that revenue will jump roughly 25% in Q1 and rise by at least 20% to $7.5 billion for the full 2022 year. For context, revenue jumped 40% last year and rose 11% in fiscal 2020.
Hitting those targets would mean Lululemon will have added $3.5 billion, or 88%, to its annual sales base in the last three fiscal years. Gross profitability took a breather from its steady march toward 60% of sales but is likely to return to that trend before long.
Those factors should combine to support spiking earnings -- and strong shareholders returns -- from this growth stock as it continues moving toward the $10 billion annual sales level.
