lululemon athletica inc. (NASDAQ:LULU)
Earnings And Technicals
Shares of Lululemon Athletica spiked up after the close on Wednesday following the release of their third-quarter earnings and the announcement of a new share buyback plan. The sports apparel company announced earnings per share of 50 cents on $544.4 million in revenues while analysts were looking for 43 cents per share on $541 million in revenues. Traders liked what they saw as shares spiked to over $68 per share in the after market trading session after closing the day at $59.84. There is plenty of upside with LULU but we could see a pullback in the short term after such a big gap up.
Analyst Notes
Pricing Power Undeniable – Upgrade from Sell to Buy. With an impressive 3Q far exceeding our expectations and running counter to broader retail and even the athletic apparel category, we are upgrading lululemon from Sell to Buy. We have always viewed lululemon as an authentic and powerful brand, well positioned in the structurally healthy athletic sector. However, over the last year we have questioned the company’s ability to sustainably rejuvenate its P&L without risking management’s goal of returning EBIT margin back toward the mid-20s, a target that we felt would need to be compromised in order to adequately reinvest into the brand and business. And although we still hope to see the company continue its recent trend of deleveraging on the SG&A line, a key emerging factor that we did not fully appreciate was the extent of the brand’s untapped pricing power, and just how underutilized this power had been…until recently.
This dynamic was on full display in 3Q with gross margin expanding 420 bps driven by both falling AUCs and rising AURs, as healthy a dynamic as one can find in the dog-eat-dog world of retailing in the digital era. Particularly encouraging is the customer’s seemingly insatiable appetite to move up toward the top of the pricing ladder to the highest quality, most technically innovative merchandise in lululemon’s assortment, a very healthy signal for this unique brand. Having seen this phenomenon play out for other athletic brands over the years, we appreciate the powerful impact a technically-led price-mix shift can have on the sustainability of sales growth and margin expansion, especially in today’s low-traffic environment. Furthermore, if push comes to shove, we believe this management team ultimately will choose to sacrifice near-term profitability to make the necessary investments in innovation, technology, brand-building, and talent to ensure sustainable long-term revenue growth. Reflecting the prospects of a higher gross margin profile and faster sales growth, we are raising our 2017 EPS estimate to $2.55 from $2.40, and our 2018 EPS estimate to $2.90 from $2.70. Our new $80 price target (was $50) reflects 28x our 2018 EPS estimate, only a slight premium to historical levels. Upgrade from Sell to Buy. LULU @ Evercore ISI
Company Profile
Lululemon Athletica Inc. is a designer, distributor and retailer of technical athletic apparel. The Company’s segments include Company-operated stores, Direct to consumer and Other. The Company offers a line of apparel and accessories for women, men and female youth. Its apparel assortment includes items, such as pants, shorts, tops and jackets designed for healthy lifestyle activities and athletic pursuits, such as yoga, running, other sweaty pursuits and athletic wear for female youth. The Company conducts its business through two channels: Company-operated stores and direct to consumer. It operates approximately 360 Company-operated stores located in the United States, Canada, Australia, New Zealand, the United Kingdom, Singapore, Hong Kong, Germany and Puerto Rico. Its direct to consumer segment includes lululemon and ivivva e-commerce Websites, www.lululemon.com and www.ivivva.com, and other country and region specific Websites.