I have a hard time finding much to complain about with Lululemon (LULU) . If I had to pick one stock that I've been absolutely wrong about, it's this one. I started watching the athletic-clothing retailer a few years ago, and never believed they'd keep their revenue story alive. There are so many competitors in this space, and I felt for a long time that the oversaturation would lead Lululemon down the path of Under Armour (UAA) . Boy was I wrong.
Because of the strong first quarter, Lululemon now expects full-year net revenues of $3.73 billion to $3.77 billion. They are calling for low, double-digit increases in comparable store sales (on a constant dollar basis), which makes sense given the trending performance.
Lululemon's first quarter results reported this afternoon largely outperformed the company's own guidance for the quarter. With strong comp sales, along with refreshed guidance, this stock remains a hot commodity. Unfortunately, the quality performance comes at quite a steep price. It'll cost you a pretty penny to chase this one.
Let's dig deeper. First-quarter revenues increased 20% year-over-year to $782.3 million. That outpaced the company's previously provided guidance of $740 million to $750 million in expected revenues. The company also matched its expectations for comparable store sales. On a constant dollar basis, the company had predicted growth in the low double digits. Lululemon reported 16% growth (on a shifted-calendar year as well as on a constant dollar basis). On a non-shifted basis with currency fluctuations, comparable store sales increased 6%.
Pertaining to its direct to consumer business, net revenue increased 33%. This area of the business is becoming a larger source of the company's revenue streams through time. Direct-to-consumer net revenues were 26.8% of the company's total sales revenue compared to 24.3% a year ago.
In a time when we've seen some names like Under Armour struggle with direction, Lululemon is putting up strong sales growth, coupled with meaningful improvements in the bottom-line. Gross profits increased 22% year-over-year to $421.7 million. That marks an increase of 80 basis points in gross margins to 53.9%. Operating income improved a comparable 23% year-over-year to $128.8 million. Operating margins increased 40 basis points to 16.5%.
Net income increased roughly 28% to $96.6 million in the first quarter. That income, coupled with progressive share buybacks taking their effect on the number of shares outstanding, allowed earnings per diluted share to increase to 74 cents vs. 55 cents per share in the first quarter of 2018.
So with all the good news, is LULU's stock an obvious buy? Full-year guidance is forecasting for $4.51 to $4.58 per diluted share. Currently trading at $177.16 per share, that means the stock has a forward price-to-earnings ratio of around 39.2x full-year earnings forecasts.
That's a high premium, but Lululemon tends to carry a high premium historically. It all comes down to an individual's risk tolerance. Being a value man, I find the price tag is too rich for my blood. But names certainly seem to be outpacing more value-oriented plays in recent years. So, I'm going to step outside of my comfort zone and call Lululemon a decent long-term "buy." They've proven me wrong time and again in terms of when the gravy train would stop. Considering the comp sales trends that have been put together by the company, they seem to have it down to a science right now. If I were to throw a word of caution out there, it would be at the increasing liabilities on the balance sheet, and the rather unattractive decrease in cash flow for the quarter.