Morningstar | Lululemon Ends Year on Solid Footing, Thanks to Continued Strength in Direct to Consumer Business
Lululemon's direct to consumer business was the highlight of its fourth quarter, with sales up 39% on a constant currency basis. When coupled with a 7% increase in comparable store sales, this performance supported 17% combined comps (constant currency). Net sales growth of 26%, operating margin of 28.4% (representing 80 basis points of expansion over the prior year period), and earnings per share of $1.65 were near our estimates for 21%, 28.8%, and $1.71, respectively. In our view, these results suggest that Lululemon's product assortment and in-store experience remain strong and that its substantial brand strength (which underpins our narrow-moat rating) remains intact.Management's 2019 guidance (calling for net revenue of $3.70 to $3.74 billion and earnings per share of $4.48 to $4.55) tracks ahead of our estimates of $3.67 billion in sales and EPS around $3.96, and we expect to lift our $82 fair value estimate by a mid-single-digit percentage as we raise our near-term forecast. Still, we're holding the line on our longer-term outlook, which incorporates high-single-digit sales growth and low-20s operating margin on average over our forecast. Shares continue to look expensive relative to our valuation, especially in light of a high-single-digit uptick in after-hours trading.
We continue to view e-commerce (which contributes nearly 30%) as an important piece of the firm's top-line prospects and appreciate management's efforts to bolster its online capabilities (including the search, navigation, and checkout functions on its websites). We surmise these investments supported the 30% increase in site traffic seen during the quarter. We expect momentum to persist in this channel, with our forecast calling for mid-teens growth in the direct to consumer business on average over the next five years. Moreover, we posit that the firm's investments in digital marketing stand to drive traffic to its physical stores, as well.
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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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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