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Athletic apparel giant Lululemon Athletica (NASDAQ: LULU) shares jumped 10% on Wednesday after the company reported better-than-expected fiscal fourth-quarter earnings.
Lululemon is on a tear. Sales and earnings are growing, and the company has restored its brand image with consumers. It wasn’t too long ago that Lululemon’s growth was under pressure. But Lululemon has made great progress since the see-through yoga pants recall in 2013. Lululemon shares are up 27% in the past two years, far better than the 9% return for the S&P 500 index in the same time.
Lululemon Stretches Earnings Growth
Lululemon reported earnings of $0.85 per share last quarter, ahead of the average analyst projection of $0.80 per share. Net profit rose 6% to $117.4 million.
This was an important earnings report for Lululemon. In the aftermath of the disappointing earnings report from Nike (NYSE: NKE) last week, which sent the stock 4% lower, Lululemon proved it isn’t seeing much of a slowdown in its own business.
The key metric for Lululemon is comparable store sales, a very important figure for retailers. Comparable sales measures growth at locations open at least one year, and indicates whether a brand concept has staying power with consumers.
In the fourth quarter, Lululemon’s comparable sales increased 5% on an organic basis, meaning excluding the effects of currency translations. Again, this beat analyst forecasts of 4.7% growth. Total revenue increased 16% last quarter, year over year.
For the full year, Lululemon generated $2.06 billion of revenue and $1.89 per share of earnings.
Another major contributor of Lululemon’s earnings growth is significant margin expansion. The company generated a 50.3% gross margin for the quarter, up more than three full percentage points from 46.9% in the previous quarter.
Going forward, continued margin expansion is at the center of Lululemon’s aggressive earnings growth guidance.
Outlook Sends Lululemon Shares Higher
Perhaps even more so than its 2015 results, Lululemon’s guidance pleased investors. The company expects the solid momentum from last year to continue for the remainder of the year, and beyond.
Management’s forecast calls for $2.29 billion to $2.34 billion in sales for the full year. Total comparable sales are expected to rise in the mid-single-digit range, after excluding the effects of foreign exchange. Earnings per share are expected to rise to $2.05-$2.15 per share for fiscal 2016.
Long-term, management has an even more ambitious forecast. The company believes it can double its earnings by 2020—no small feat for a large company in a fiercely competitive industry.
But Lululemon feels it can achieve this goal, due largely to a change in how the company manages its supply chain. Lululemon is pursuing shipping via ocean freight rather than by air freight. This is expected to meaningfully reduce distribution costs. Furthermore, Lululemon plans to more efficiently place orders to enhance efficiency and help reduce order cancellations.
While there’s no guarantee that these measures will produce the desired results, investors seem to be buying Lululemon’s growth story.
Lululemon Stock May Be Too Hot to Handle
Lululemon’s earnings report was a clear relief to investors, as the company benefited from a strong holiday shopping season. This was great news. Last quarter represented a critical time for retailers. And, it’s also true that Lululemon’s goal of doubling earnings by 2020 is a reason to be optimistic.
But there is no certainty that these efforts will materialize as planned. In the meantime, investors are paying a very high price for Lululemon.
Lululemon stock now trades for 35 times trailing earnings per share, and 32 times forward EPS estimates. This is a far higher multiple than the S&P 500 Index, which trades for 20 times earnings, as well as the retail sector, where many stocks hold low double-digit multiples.
While Lululemon stock could conceivably continue to perform well, if the company manages to hit its operating targets, only those investors with a strong tolerance for risk should consider buying here. Risk-averse investors should wait for a better buying opportunity, or avoid the stock altogether.
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