After An Impressive Start To The Fiscal Year, How Is Lululemon Athletica Expected To End FY-2019?

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Lululemon Athletica (NASDAQ: LULU) released its Q1 2019 financial results on June 12, 2019, followed by a conference call with analysts. The company beat consensus estimates for both revenue as well as earnings. LULU reported revenue of $782.3 million in Q1 2019, marking a growth of 20.4% over Q1 2018. Higher revenue was driven by comparable store sales growth of 6% and a whopping 33% increase in direct-to-consumer net revenue during the quarter, along with net opening of 15 new stores, higher customer traffic, better conversion rates, and growth in the wholesale business. However, on a sequential basis, revenue declined by 33% due to the seasonality factor, as revenues are highest in the fourth quarter of a year owing to the holiday season. Earnings came in at $0.74 per share in Q1 2019, much higher than $0.55 per share in the year ago period, primarily driven by lower product costs, favorable mix of higher margin products, and a decrease in the effective tax rate.

You can view the key announcements in Trefis’ interactive dashboard – How did Lululemon fare in Q1 2019 and what is the full year outlook? In addition, here is more Trefis Consumer Discretionary Services data.

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A Quick Look At LULU’s Revenue Segments

Lululemon reported total revenue of $3.29 billion in FY 2018. Key revenue segments are:

  • Company-operated stores: $2.13 billion revenue in FY 2018 (65% of total revenue). This includes sale of yoga wear, running apparel, training apparel, and sports-wear for women from the company’s retail stores.
  • Direct to consumer: $0.86 billion revenue in FY 2018 (26% of total revenue). This includes the net revenue generated from e-commerce website www.lululemon.com, other country and region-specific websites, and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via the distribution centers or other retail locations.
  • Other: $0.3 billion revenue in FY 2018 (9% of total revenue). This includes sales from temporary locations, sales to wholesale accounts, showrooms, through license and supply arrangements, and warehouse sales.

A] Revenue Trend

Company-Operated Stores

  • Store revenue increased by 17% (y-o-y) to $506.4 million in Q1 2019, mainly due to 44 net new lululemon branded company-operated stores opened since Q1 2018, spread across North America, Asia, Europe, and Australia/New Zealand.
  • Additionally, comparable store sales increased 6% (y-o-y) in Q1 2019, driven by increased store traffic.

Direct-To-Consumer

  • Direct-to-consumer sales increased by 33% (y-o-y) to $209.8 million in Q1 2019, primarily due to increased website traffic.
  • With increased digitization and higher traffic on the company’s website and mobile apps, the contribution of digital sales to total revenue increased from 24.3% in Q1 2018 to 26.8% in Q1 2019.

Other Revenue

  • Other revenue increased 12% (y-o-y) to $66 million in Q1 2019, driven by an increased number of temporary locations, including seasonal stores, increase in net revenue from existing outlets, and sales to wholesale accounts.

B] Total Expense and Profitability Trend

On an absolute basis, total expenses have witnessed a rising trend due to an increase in cost of sales and SG&A expense, along with higher tax outgo. However, as a % of revenue, LULU has been able to manage its expenses efficiently.

  • Cost of Goods Sold: Cost of sales increased in Q1 2019 due to higher expenses related to product department and distribution centers, unfavorable foreign exchange, and higher occupancy and depreciation cost. However, cost of sales as a % of revenue decreased by 80 basis points due to increase in product margin, driven by lower product costs, a favorable mix of higher margin product, and lower markdowns.
  • SG&A: SG&A cost increased by 22% (y-o-y) in Q1 2019, driven by higher employee cost, packaging cost, digital marketing expenses, branding cost and expenses related to new operating locations. SG&A as a % of revenue increased by 40 basis points during the quarter.
  • Effective Tax Rate: The effective tax rate declined from 29.9% in Q1 2018 to 26.4% in Q1 2019, driven by an increase in tax deductions related to stock-based compensation.

Net income margin witnessed an increase to 12.3% in Q1 2019, compared to 11.6% in the year-ago period. Higher profitability was driven by better cost management and higher revenue growth.

Full Year Outlook

  • For the full year, we expect revenue to increase by about 14.6% to $3.77 billion in FY 2019.
  • Higher revenue is likely to be driven by an increased focus on digital penetration, higher customer traffic, strong comparable store sales in the retail business, along with investment in improving the company’s brand image.
  • Net income margin is expected to increase from 14.7% in FY 2018 to 15% in FY 2019, driven by a focus on high-margin brands, lower markdowns, and lower product cost.

Trefis has a price estimate of $183 per share for LULU’s stock. 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 an increasing focus on enhancing shareholder returns through buybacks, would likely provide support to LULU’s stock price going forward.

 

Do not agree with our forecast? Create your own forecast for Lululemon Athletica by changing the base inputs (blue dots) on our interactive dashboard.

 

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