Morningstar | LULU Updated Star Rating from 07 Dec 2018
Narrow-moat Lululemon posted third-quarter results that largely came in line with our expectations, with 21% net sales growth (a touch above our 20% estimate) and diluted earnings per share of $0.71 (matching our estimate). While 7% constant currency comparable store sales were on par with our outlook, further strength in the direct-to-consumer business (up 46%, on top of a 25% increase in the prior-year period) outpaced our 35% estimate. We contend this momentum in its DTC business (which contributed more than 25% of sales during the quarter) has been propped up by the firm's investments in its digital capabilities (in the form of marketing and analytics), which have supported improvements in the customer's online experience (in browsing and search) and faster processing times during checkout. This is evidenced by a 35% uptick in site traffic and high-single-digit increase in conversion rates. We model DTC sales growing at a low-20s clip on average over the next five years, contributing around one third of revenue by fiscal 2022. Profitability also continues to improve, with adjusted operating margin expanding 80 basis points to 18.2% (comparable to our estimate) as lower product cost, fewer markdowns, and favorable mix all enhanced product margin.Management ticked up its full-year sales outlook (to $3.24 billion-$3.25 billion, from $3.19 billion-$3.24 billion prior and against our $3.19 billion estimate), and we expect to slightly raise our top-line outlook to incorporate further strength in the e-commerce business. However, we're holding steady on our full-year profitability assumptions, which call for operating margin around 21%. As we incorporate these results and the time value of money since our last update, we expect to raise our $77 fair value estimate by around 5%. However, our longer-term outlook (high-single-digit combined comp growth and low-20s operating margin on average over the next five years) remains intact.
lululemon athletica is a designer, distributor, and retailer of athletic apparel. Co.'s athletic apparel is marketed under the lululemon and ivivva brand names. Co. provides a line of apparel and accessories for women, men and female youth. Co.'s apparel assortment includes items such as pants, shorts, tops, and jackets designed for healthy lifestyle and athletic activities such as yoga, running, training, other sweaty pursuits, and athletic wear for female youth. Co. also provides fitness-related accessories. Co. primarily conducts its business through two channels: company-operated stores and direct to consumer. As of Jan 28 2018, Co. operated 404 stores.
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