Can Lululemon Athletica Continue Its Impressive Show In Q4 2018?

by Trefis Team
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Lululemon Athletica Inc. (NASDAQ: LULU), a Canadian athletic apparel retailer, is set to announce its Q4 2018 results on March 27, 2019, followed by a conference call with analysts. The market expects the company to report revenue of $1.15 billion during the fourth quarter, 23.8% higher than in the year-ago period. Higher revenue is likely to be driven by impressive growth in the ‘direct to consumer’ sales, increase in company-operated store net revenue, and higher comparable store sales. Earnings for the quarter are expected to come in at $1.74 per share in Q4 2018 compared to $1.33 per share in Q4 2017. Higher EPS is expected to be a reflection of favorable product mix, lower product costs, absence of any impairment/restructuring cost unlike in the previous year, partially offset by increase in employee-related costs and income tax expense.

We have summarized our key expectations from the announcement and our outlook for the company in our interactive dashboard – What to expect from Lululemon Athletica’s 2018 Results? In addition, here is more Trefis Consumer Discretionary Services data.

Key Factors Affecting Earnings

Digital growth: During the first nine months of 2018, LULU’s direct to consumer segment achieved a year-on-year growth of almost 51% and we expect this trend to continue as LULU continues to expand its digital framework. The online segment is the fastest growing vertical for the company and is likely to contribute over a quarter of the company’s total revenue in 2018. With increased digitization, higher traffic on the company’s website and mobile apps, along with the recent improvement in conversion rates, this is expected to lead to a healthy growth rate of the segment along with a further rise in the share of digital sales to over 28% in 2019.

Retail store business: Almost 80% of the company’s stores are located in North America. However, LULU has recently made efforts to increase its presence in emerging markets like China, where the store count has increased significantly in about a year, from 6 in mid-2017 to 17 stores as of September 2018. Further, it has shut down a number of its less successful ivivva brand stores and replaced them with regular stores in the U.S All these strategies are expected to benefit the segment in the coming quarters. Retail store sales contributes the largest share to the company’s revenues. Comparable store sales increased by 8% in the first three quarters of 2018. Along with comparable store sales growth, addition of new stores during the year is expected to drive revenues from the segment to grow approximately 7.6% in 2018. Though the segment is expected to continue to stay on the growth path, we believe that with the tremendous growth in digital penetration and online traffic, growth in retail store revenue would remain subdued at close to 7% going forward, bringing the share of the segment to total revenues down at close to 60% over the next one year, from the current level of 70%.

Higher margin: In 2017, LULU shut down a number of its less successful ivivva brand stores, which led to the company incurring $38.5 million of impairment/restructuring charges. In the absence of any restructuring during 2018, the company’s margins are expected to receive a boost for the year. Additionally, favorable product mix and lower product costs, coupled with increased online presence to reach a wider audience in a cost-effective way, is likely to provide an uptick to LULU’s bottom line. However, these benefits are expected to be partially offset by higher employee costs, primarily driven by growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher retail bonus expenses. Further, higher tax expense on the back of a one-time transition tax due to the implementation of TCJ Act would weigh adversely on margins. We expect LULU to end 2018 with a net income margin of 11.5%, up from 9.8% in 2017.

Stock Drivers

In June 2018, LULU’s management increased the company’s existing $200 million share repurchase program to $600 million. During the first three quarters of 2018, LULU repurchased shares worth $414.3 million, followed by an additional repurchase of shares worth $5.2 million from October 2018 to December 2018. Though the company’s stock price has increased for a major part of 2018 (in spite of a short period of volatility in the stock during the year), we believe that impressive revenue growth trends, aggressive expansion of its digital ecosystem, strong same-store sales growth, focus on high margin brands and rising profitability, coupled with a renewed focus on steps to enhance shareholder returns, would likely provide support to LULU’s stock.

We have a price estimate of $160 for the company, which is higher than its current market price.

 

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