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- Lululemon's stock continued to exceed analysts' expectations. The company released stellar results in the second quarter.
- We expect Lululemon's shares to benefit from strong sales and earnings growth over the coming quarters.
- The high valuation of the security seems justified.
Lululemon Athletica (LULU) continued to impress with its quarterly performances. The company has maintained its long trend of exceeding analysts' estimates and posted strong growth in sales and earnings. Notably, Lululemon has experienced strong growth despite difficult year-over-year comparisons, which is impressive. The company has for the second time increased its sales and financial results, which could strengthen its inventory.
We are impressed by Lululemon's outstanding financial performance in recent quarters. The company's net income has increased more than 30% in the last four consecutive quarters. Net income exceeded analysts' estimates. At the same time, the company's turnover has increased by more than 20% in the last six consecutive quarters.
Lululemon faces fierce competition in the coming quarters, which could affect its growth rate. However, we are optimistic about the Lululemon stock because of its ability to generate significant sales and earnings growth. We believe that product innovation, omnichannel offerings and expansion into new markets could boost the company's sales and profitability over the coming quarters.
The stock of Lululemon has increased by about 55% since the beginning of the year. The security trades at a high valuation multiple. However, the high valuation seems justified given the strong growth rate of sales and profits of the company.
Focusing on merchandise, redeveloping stores and e-commerce initiatives will likely result in an increase in the company's traffic. Lululemon doubles its number of stores in China. The company is also expanding its square footage in other regions, which will drive sales. Margins will likely increase modestly due to the sales leverage.
Second quarter results of Lululemon
Lululemon achieved net sales of $ 883.4 million in the second quarter, exceeding analysts' estimates of $ 845.7 million. Net revenues increased 22% year-over-year, reflecting total comparable sales growth of 15%. At the same time, same-store sales increased 10% in the second quarter.
The company's revenues increased by 35% in Europe, while the APAC region grew by 33%. In the APAC region, China has distinguished itself with outstanding sales and market growth of 68%. In North America, revenues increased 21% due to increased traffic.
Gross profit increased 23% to $ 485.8 million. At the same time, gross margin increased 20 basis points to 55%. The increase in gross margin drove the operating margin up 50 basis points to 19%.
Strong sales and margin growth continued to support Lululemon's net results, which rose sharply in the second quarter. The company generated $ 0.96 EPS, up 35% year-on-year and above analysts' estimate of $ 0.89. Share buybacks have amortized the company's results.
Analysts are optimistic about the title Lululemon
Lululemon's outstanding performance in the second quarter led several analysts to increase their target price on the stock. Analysts have made the following upward revisions:
- Jefferies has increased the target price from $ 175 to $ 200.
- The target price for Credit Suisse is USD 235, compared to USD 198 previously.
- RBC raised the target price from $ 200 to $ 215.
- Cowen raised the target price from $ 200 to $ 214.
- Susquehanna raised the target price from $ 210 to $ 222.
- JP Morgan raised the target price from $ 200 to $ 230.
In particular, most analysts of the Lululemon stock hold favorable prospects. Of the 30 analysts, 18 recommend a "purchase", and 12 recommend a "maintain". The target price of $ 199.42 established by consensus of analysts indicates an increase of 5.8% on the basis of a closing price of 188.41 USD Thursday.
Optimistic outlook to drive Lululemon's action
The strong performance of the first half of the year led Lululemon management to increase sales for the year and earnings prospects for the second consecutive time. The company's revenues are expected to be $ 3.80 billion, or $ 3.84, up from the previous forecast of $ 3.73 billion, to $ 3.77. Meanwhile, Lululemon expects his EPS to be between $ 4.63 and $ 4.70. Previously, the company expected its EPS to be between $ 4.51 and $ 4.58 for fiscal 2019.
The Lululemon stock trades at 33.9 times its estimated EPS at 5.56 for the 2020 fiscal year, which seems high. However, analysts expect the company's sales and earnings to continue growing at a double-digit rate for the foreseeable future, which justifies its high valuation.
Lululemon shares closed up 4.3% on Thursday. At the same time, equities were trading about 4% higher after the afternoon, after the second quarter results.
Market Realist analyst Amit Singh does not own Lululemon shares.
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