Here’s What’s Stretching Lululemon Athletica to New Heights

Successful companies learn from past mistakes and then turn their attention to the future. No company has learned that lesson better than lululemon athletica (NASDAQ: LULU) — and learned it the hard way, having gone from the pinnacle of the retail world to the depths of scandal-plagued pessimism. Yet through it all, a loyal customer base put Lululemon in a position where it had the potential to recover, and recently, the yoga retail specialist has been able to restore some of its former glory.

Coming into Wednesday’s fiscal first-quarter financial report, Lululemon investors wanted further evidence that the tough times are now completely behind the company. The results that Lululemon posted were indeed encouraging, and it looks like the retailer has gotten itself back in the groove and could see even greater gains over the long run.

Image source: lululemon athletica.

Lululemon starts the year off strong

Lululemon’s fiscal first-quarter results once again showed how much demand there is for quality athletic wear in the apparel market. Revenue soared 25% to $649.7 million, bringing back memories of the growth rates that the yoga specialist posted early in its history. Net income more than doubled from year-ago levels to $75.2 million, and the resulting earnings of $0.55 per share came in well above the $0.46-per-share consensus forecast among those following the stock.

It’s hard not to be impressed with the performance Lululemon managed with its key metrics. Total comparable sales jumped 20%, with direct-to-consumer net revenue soaring 62%. Even comparable-store sales in Lululemon’s brick-and-mortar store network were strong, accelerating to an 8% growth rate compared to the previous year’s quarter. Favorable foreign-exchange movements also helped give Lululemon a boost, raising revenue growth by two percentage points.

Lululemon continued to make progress in squeezing the most profit from its opportunities. Gross margin jumped almost three percentage points even after adjusting for one-time impacts that held the company back in last year’s period. Operating margin nearly doubled from year-ago levels and rose four full percentage points on an adjusted basis. A nearly three-percentage-point drop in Lululemon’s effective tax rate also contributed to the yoga specialist’s bottom-line performance.

Expansion in the Lululemon store network took a bit of a pause during the winter quarter. Just seven new stores opened, bringing the total to 411, and 15,000 more square feet of space brought Lululemon’s real estate portfolio to nearly 1.28 million square feet.

With the February resignation of Laurent Potdevin, other executives gave comments about Lululemon’s results. Executive chairman Glenn Murphy simply expressed his pleasure with the company’s performance, while COO Stuart Haselden noted that “our first quarter results reflect the ongoing strength of our business and our continued focus on product innovation, global growth, digital acceleration, and most importantly investing in our people.”

Can lululemon athletica keep pointing higher?

There doesn’t appear to be much holding Lululemon back. In the COO’s words: “Our momentum remains strong and we are optimistic for 2018 and beyond.”

That favorable outlook showed up in the updates that Lululemon gave investors in its guidance for future results. For the fiscal second quarter, the yoga retailer believes that it will post a high-single-digit percentage rise in comparable sales, leading to revenue of $660 million to $665 million. Earnings should come in between $0.46 and $0.48 per share.

Lululemon boosted its projections for the full fiscal year. The company now believes that revenue will be $3.04 billion to $3.075 billion, marking a jump of more than $50 million from its previous guidance. Similarly, earnings of $3.10 to $3.18 per share for the year are a $0.10-per-share improvement over what Lululemon expected just a few months ago.

Lululemon investors were quite pleased with the results, and the stock climbed almost 5% in after-hours trading following the announcement, pushing its share price to an all-time high. With underlying consumer trends intact and the company now moving forward operationally, Lululemon is firing on all cylinders and looks poised to keep up the pace well into the future.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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