lululemon athletica inc. (NYSE:LULU) is poised for substantial growth in both its top and bottom lines as it prepares to announce its second-quarter fiscal 2023 results on August 31, after the market closes.

The Consensus Estimate for the company’s fiscal Q2 sales stands at $2.2 billion, reflecting a robust 16.1% surge compared to the previous year’s quarter. Earnings are expected to reach $2.53 per share, representing a solid 15% increase from the $2.20 reported in the same period last year. Notably, earnings estimates have edged up by a penny within the past 30 days.

The company managed to deliver a positive earnings surprise of 15.7% in the previous reported quarter. Over the last four quarters, lululemon’s earnings have consistently surpassed estimates by an average of 9.9%.

Key Points to Consider

lululemon continues to experience a strong business momentum, benefiting from a positive consumer response to its products. Enhanced store traffic, driven by customers returning to physical stores and a robust online performance, are expected to contribute positively to the company’s revenue for the upcoming quarter.

The company has strategically leveraged both physical retail and online engagement to bolster its financial performance. By focusing on enhancing the in-store experience and implementing omni-channel capabilities such as buy online pick up in-store (BOPUS) and ship from store, lululemon aims to provide seamless customer experiences. These efforts, along with store expansion initiatives, are projected to have a favorable impact.

Furthermore, lululemon’s online demand has witnessed improvement, largely due to its substantial investments in e-commerce. The company’s initiatives include curbside pickups, same-day deliveries, and BOPUS services, enhancing the online shopping experience. The outcomes of these efforts are anticipated to reflect positively in the second-quarter fiscal 2023 revenue results.

 

Our projections indicate that company-operated stores and the direct-to-consumer channel will both exhibit a 15.3% YoY revenue growth in the fiscal Q2. Additionally, other sales are predicted to increase by 15.7% YoY.

During the previous earnings call, management expressed confidence in sustaining the strong business momentum throughout fiscal 2023. lululemon anticipates net revenues of $2.14 billion to $2.17 billion for the fiscal Q2, indicating a substantial 15-16% YoY growth. The company’s EPS projection for the quarter ranges from $2.47 to $2.52.

Improved gross and operating margins have also been evident in recent quarters, attributed to reduced expenses. Factors like lower air freight costs contributing to product margins and a favorable regional mix have led to increased gross margins. These improvements, combined with a lower SG&A expense rate, have positively impacted the operating margin.

We anticipate the adjusted gross margin to expand by 210 basis points YoY to reach 58.6% in the fiscal Q2, driven by reduced cost of sales due to lower freight expenses. Furthermore, the adjusted operating margin is projected to remain nearly flat at 20.9% compared to the actual figures from the year-ago quarter. In terms of dollar amounts, the adjusted operating income is likely to see a YoY increase of 15.4%.

For the second quarter of fiscal 2023, management forecasts a gross margin expansion of 200-220 basis points, primarily attributed to decreased airfreight costs. This expansion is anticipated to be partially offset by strategic investments supporting growth, including supply chain enhancements, distribution centers, and product teams. Additionally, a modest deleverage on occupancy and depreciation is expected. The operating margin is predicted to expand by 10 basis points YoY.

However, lululemon has been grappling with elevated inventory levels, which is a concern. The company’s inventory grew by 24% at the close of the first quarter of fiscal 2023. Management anticipates inventory growth to align with sales growth in the latter half of 2023, implying a slight increase by the end of the fiscal Q2.

Featured Image: Unsplash @ Marco Tjokro

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