Lululemon Athletica’s First-Quarter Success Was About More Than Just Booming Digital Sales

Just about everything is going right for Lululemon Athletica (NASDAQ: LULU) these days. The yoga-inspired apparel specialist isn’t just raising the bar on its key growth metrics — it’s also boosting profitability even as the business shifts toward the e-commerce channel.

Most retail peers are moving in the other direction, with operating margins shrinking due to the extra costs associated with digital fulfilment. Executives recently held a conference call with analysts to help explain why Lululemon is succeeding in an area that’s tripped up so many of its rivals.

Below are a few highlights from that presentation.

Image source: Getty Images.

Stretching to new records

What I’d like our investors to hear is that the success we are seeing now is not merely the lapping of weak prior-year comparisons.
— Chief Operating Officer Stuart Haselden

The results benefited from going up against an unusually soft prior-year period — the first quarter of 2017 was marked by a decline in comparable-store sales, after all, and the digital sales channel was flat a year ago.

That starting point made it a bit easier to manage growth this time around, but the 20% comparable sales spike and 60% e-commerce increase also reflected positive momentum in key areas like product design, marketing, and traffic both in stores and online. These wins combined to push Lululemon’s growth pace significantly above management’s forecast.

What’s working

This momentum reflects the structural long-term investments that we’ve made and continue to make to drive the revenue increases that are enabling us to deliver on our multiyear plans.
— Haselden

While noting that the broader business is being lifted by positive trends in the health and wellness apparel niche, executives believe their strategic initiatives are supercharging the retailer’s results, too. In e-commerce, investments in the website and shopping app helped improve both traffic and conversion rates, for example. Customer traffic was positive inside its stores, too, and fresh product releases drove double-digit comps spikes in its core sales segments.

Supercharging profits

We know we have to make investments to drive growth and improve our business but at the same time, we’re committed to looking for efficiencies and that’s where that [profitability] performance comes through.
— Executive Chairman Glenn Murphy

Lululemon managed big profitability increases this quarter, with gross margin jumping to 53.1% of sales from 50.4%. That success was a reflection of innovative product launches that helped the retailer stand out from all of its peers. “We’re a premium brand,” Murphy explained, “but that is still a phenomenal performance.”

Data by YCharts.

The company paired that gross profit gain with an even bigger boost in operating profitability. Expenses fell as a percentage of revenue, which makes Lululemon almost unique among brick-and-mortar retailers.

Most peers, after all, have seen operating margin decline as their business shifts toward the online selling channel. Lululemon’s, in contrast, jumped to 16% of sales from 12% a year ago. With help from the gross margin boost, the increase helped operating income soar 65% higher in the quarter.

Building on the success

We are seeing consistent results across several key parts of the business that are now extending into Q2 and further setting the stage for us to achieve our 2020 goals.
— Haselden

Image source: Getty Images.

Lululemon’s first-quarter results represented accelerating gains over its impressive holiday quarter, but management sees no reason to expect the positive momentum to end. Instead, a flood of new product releases, combined with more opportunities to increase efficiencies in areas like the supply chain and sourcing, should keep sales and profitability both marching higher.

Comparisons against 2017 get harder from here on out, but management is confident that it will achieve high-single-digit comps growth for the year as sales cross $3 billion. Lululemon’s long-term goal is $4 billion of annual revenue by 2020, and executives say they’re now “firmly on track” to hit that ambitious target.

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Demitrios Kalogeropoulos 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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