The market is comfortable taking shares of Lululemon Athletica Inc. (LULU) even higher on Thursday morning after a solid earnings beat and raised guidance.
Shares of the Vancouver-based apparel retailer jumped nearly 7% in pre-market trading before settling back to a gain of around 5% about 45 minutes before Thursday's opening bell. Defying the trajectory of the broader retail sector, Lululemon already was up more than 40% year to date before its earnings announcement.
The move to the upside comes after the producer and retailer of yoga pants and other athletic lifestyle clothing beat on the top and bottom lines for its fiscal first quarter ended May 5.
"We are very pleased to see continued strong momentum in the business. The Power of Three Growth plan which we detailed at Analyst Day is serving as a driving force to move us forward to achieve our five-year growth plan," CEO Calvin McDonald told analysts on Wednesday evening. "Across the company, teams are executing at extremely high levels. In Q1, our total revenue grew by 20%, constant dollar comps increased 16% on top of 19% increase last year and earnings per share increased 35%."
Cashing In on Comps
Comparable-store sales were a big point of interest for investors, as they rose a remarkable 6% in the quarter. Direct-to-consumer sales also saw solid growth, notching a 33% increase in revenue year over year, building the case for LULU as a leading omnichannel retailer.
$LULU store comparables up 6%. Not too bad for brick and mortar. Someone is still going to the stores.— Tracey Ryniec (@TraceyRyniec) June 12, 2019
"LULU's 16% [constant currency dollar] comp demonstrates it's continuing to rise above apparel peers seeing challenged results," RBC Capital Markets analyst Kate Fitzsimons said. "Shares look expensive but rightly so given consistency of quality, strong results."
Fitzsimons moved her price target for Lululemon to $200 per share from $190 while maintaining a "Buy" rating based on its ability to separate itself from its battered brick-and-mortar peers.
Moving forward, Lululemon is expecting strength to continue throughout the year as consumer trends buoy the stock story.
Lululemon now expects fiscal full-year earnings of $4.51 to $4.58 a share, which is up from its previous guidance range of $4.48 to $4.55, on revenue of $3.73 billion to $3.77 billion.
Tackling the Trade War
It is important to note that the increase in guidance includes tariff impacts, likely making it conservative if trade troubles lessen in the near term.
"Our guidance reflects a modest impact from potential new tariffs and also additional costs to airfreight product in order to avoid anticipated port congestion in the Asia region due to the pending tariff increases," CEO McDonald said. "We are committing to higher airfreight usage as the hedge against disruption in ocean shipping lanes as we approach the key dates related to tariff increases."
In spite of the trade spat, Lululemon said it is expanding its footprint in China and generating solid sales in the region.
"We participate in that but we're very cognizant of how our brand is being introduced and developed, and where we take important steps to ensure that we have a very premium positioning for the brand," COO Stuart Haselden said. "We're seeing great traction broadly across China and a lot of signals that are suggesting that our brand is gaining traction."
Haselden said the digital push in China coincides with the company's focus on direct to consumer and a high-profile partnership with Alibaba Group Holding's (BABA) Tmall marketplace in the country.
While he noted that the Tmall partnership comes at the risk of margin compression, the traffic the store can generate from the partnership should continue to buoy sales in coming quarters.
Looking further down the line, McDonald built the case for a five-year growth plan that could make Lululemon a compelling long-term holding for investors eyeing the retail sector.
"When looking at our product innovation pillar, over the next five years we expect annual growth in our core women's business to be in the low double digits while men's is planned to grow at 20% per year," he said.
McDonald noted that the women's business drove a 19% comparable sales increase in the first quarter while men's comparable sales, led by the ABC franchisee, jumped 26% in the quarter.
The men's business long has been a key growth prospect for the company. The latest earnings results appear to be building the case for long-term success in tapping this market for LULU and continuing brand strength even into ancillary products such as grooming.
"We expect LULU can see at least a superior mid- to high-teens EPS growth profile in the next five years aided by merchandise margin expansion due to more favorable product costs including freight opportunities, eventual leverage in non-merchandise items in [cost of goods sold], and a return to SG&A leverage," RBC's Fitzsimons advised clients. "Assuming a rebuild to a ~24% level, our longer-term base case model suggests a $6 billion+ brand with earnings power of ~$8-9/share."