Lululemon took a big risk when it decided to get into clothing for men.
That risk has resulted in a big reward. In Q2, Lululemon’s net income exploded 35% over the same period last year. This was led by a 35% revenue increase in the men’s business.
Lululemon delivered $0.96 per share in net income, blowing away the $0.89 estimate.
There Are No Words for This Level of Success
Yet there is one metric that has jaws dropping all around the retail marketplace. Lululemon’s same-store sales increased 15%.
To give some context to how powerful and unexpected that number is, consider the following. Comparable same-store sales growth is the single most important metric for any retail operation. It tells us if more or fewer consumers are going into stores and whether or not those stores have pricing power.
Same-store sales growth is a combination of any increase in foot traffic plus an increase in the average ticket price.
Most businesses are very happy to achieve between 4% and 6% same-store sales growth. Anything less than 4%, or (God forbid) negative, is usually indicative of a business that is losing favor or in a very mature phase of its life.
Anything from 7% to 10% is considered extraordinary. The only businesses that seem to hit this number repeatedly are home improvement stores.
It is thus astonishing that Lululemon came in at 15%. In fact, on a constant dollar basis, same-store sales growth was actually 17%.
Other Metrics Blew Away Estimates
It is clear that the company’s decision to get into men’s athletic wear has proved out.
These results also contributed to the following notable metrics.
Revenue increased 23% on a constant dollar basis, while “direct to consumer” net revenue increased 31% on a constant dollar basis.
We also want to see revenue increases come close to inventory increases. If inventory increases significantly outpace revenue increases, it may be a signal that the company is carrying too much inventory that it will later have to discount.
However, inventories increased by 26%, and that’s perfectly acceptable for a company in the growth phase.
Gross profit hit $486 million, an increase of 23% over last year, operational income grew 25% to $168.0 million, and net income ballooned 35% to $125 million.
The Future Looks VERY Bright
For the entire fiscal year of 2019, Lululemon is now projecting between $3.80 billion and $3.840 billion, again based on a very juicy comparable sales increase in the low teens.
Diluted earnings per share are expected to be between $4.63 and $4.70.
The company said earlier this year that it wants to double its men’s athletic sales as well as its online sales over the next five years. It is also expanding aggressively internationally, hoping to expand international revenue by a factor of four.
Ed Butowsky, Managing Partner at Chapwood Capital Investment Management in Dallas, tells CCN:
“This was an incredible quarter for Lululemon. They were really only known as a women’s athletic fashion company, so the move into men’s was seen with skepticism. Yet as their results show, they are successfully executing in a very competitive space.”
Lululemon stock was up 4.3% in regular trading and is up another 3.3% in after-hours trading. The problem is that it now trades at over 40 times expected 2019 earnings.
That’s not unreasonable for a company growing earnings of 35% in this stock market. Still, be cautious.