Image Source: Lululemon Athletica Inc – First Quarter of Fiscal 2021 IR Earnings Infographic

By Callum Turcan

Athleisure wear maker Lululemon Athletica Inc (LULU) recently reported first quarter earnings for fiscal 2021 (period ended May 2, 2021) that smashed past both consensus top- and bottom-line estimates. Its company-operated stores posted net revenue growth of 106% year-over-year as global economies began to recover from the coronavirus (‘COVID-19’) pandemic. The company’s direct-to-consumer (‘DTC’) net revenue grew 55% year-over-year (the e-commerce side of its business) last fiscal quarter, keeping in mind its DTC business more than doubled its net revenues in fiscal 2020. We were impressed with Lululemon’s latest results, and there could be room for shares of LULU to continue climbing higher. The top end of our fair value estimate range sits at $450 per share (well above where LULU is trading at as of this writing).

Guidance Boost

The company boosted its full-year guidance for fiscal 2021 in conjunction with its latest earnings report. Now Lululemon is guiding for $5.825 billion - $5.905 billion in net revenue (up from $5.55 billion - $5.65 billion previously) and adjusted diluted EPS of $6.73 - $6.86 (up from $6.30 - $6.45 previously) in fiscal 2021. At the midpoint, the firm aims to grow its net revenues by ~33% and its diluted EPS by ~36% on an annual basis this fiscal year. Shares of LULU have been on a steep upward climb of late as the company’s outlook is quite bright.

During the firm’s latest earnings call, management noted that Lululemon expects its e-commerce business will grow by the high single-digits this fiscal year. Growth in its e-commerce business during the second half of fiscal 2021 is expected to offset a decline during this current fiscal quarter, but we stress that the COVID-19 pandemic makes year-over-year comparisons a noisy read at times. Management noted that roughly 93% of Lululemon’s stores were open during the earnings call. In the near term, the company expects to face headwinds from logistical constraints.

Earnings Update

In the fiscal first quarter, Lululemon’s GAAP revenue grew 88% and its GAAP gross profit more than doubled year-over-year. The company’s GAAP gross margin surged ~580 basis points during this period. Management recently noted that “leverage on occupancy, depreciation and product team costs” combined with higher product margins (even when factoring in logistical headwinds) and favorable foreign currency movements played a key role in supporting Lululemon’s GAAP gross margins last fiscal quarter. The company’s GAAP operating income almost grew six-fold year-over-year last fiscal quarter, aided by economies of scale and stronger gross margin performance.

At the end of the company’s fiscal first quarter, Lululemon had $1.2 billion in cash and cash equivalents on hand with no debt on the books, though the firm does have sizable lease liabilities to be aware of. Having a pristine balance sheet better enabled Lululemon to navigate the COVID-19 pandemic as it retained the financial firepower to invest in its DTC business at a time when the proliferation of e-commerce was accelerating.

The firm generated ~$0.15 billion in free cash flow during the fiscal first quarter and spent a little under $0.1 billion buying back its stock during this period. Lululemon does not pay out a common dividend at this time, though should the firm want to, it possesses the financial strength to initiative a sustainable payout policy.

In June 2020, Lululemon announced it was buying fitness startup MIRROR for $0.5 billion in cash and the deal closed a month later. We are intrigued by the potential synergies this deal offers (here is a link to our July 2020 article covering the deal). MIRROR sells interactive gym offerings (a digital screen that goes up on a wall in your house or other place of choosing) along with digital fitness memberships, and there is ample room for synergies between this business and Lululemon’s apparel business.

Management estimates MIRROR will generate $250 million - $275 million in revenue this fiscal year. Please note this is a very competitive industry as MIRROR competes with other health and fitness disruptors like Peloton Interactive Inc (PTON) along with traditional gyms (at a time when traditional gyms are beginning to reopen in earnest across the US and elsewhere).

Concluding Thoughts

We are not interested in adding shares of LULU to any of our newsletter portfolios at this time, though we are keeping an eye on the firm given its impressive performance of late and promising growth outlook. Lululemon’s focus on omni-channel selling capabilities put the firm in a prime position to navigate the pandemic and related lockdowns, with an eye towards its DTC operations. Going forward, ongoing strength at its DTC business combined with the resumption of “normal” activities at its physical store footprint as global economies reopen in the wake of vaccine distribution efforts should enable Lululemon to continue growing at a rapid clip. Management’s recent guidance boost for fiscal 2021 is a testament to Lululemon’s confidence in its operational prowess.

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Callum Turcan does not own shares in any of the securities mentioned above. Chipotle Mexican Grill Inc (CMG), Dollar General Corporation (DG), Domino's Pizza Inc (DPZ) and The Walt Disney Company (DIS) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Dick’s Sporting Goods Inc (DKS) and Home Depot Inc (HD) are both included in Valuentum’s Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.