Impressive Top-Line Growth for Lululemon
We expect to raise our fair value estimate, but shares are still overvalued.
Narrow-moat Lululemon (LULU) began its fiscal year on strong footing, as total revenue grew 25%, including an impressive 19% constant currency increase in total comparable sales. This robust growth was driven by the e-commerce business, which grew 60% in constant currency, in line with our estimate for the quarter. E-commerce contributed 24% of sales this quarter (versus 19% in the first quarter of 2017), and we continue to think an ongoing shift toward this business should have a positive impact on the firm's bottom line. In this context, adjusted operating margin expanded 400 basis points to 16.1%, outpacing our low-teens expectation. Comparable-store sales were also strong, growing 6% (lapping a 1% decline in the prior-year period). We plan to raise our near-term outlook to incorporate these results, as our current expectation for fiscal 2018 adjusted earnings per share now falls below the low end of management's revised guidance (raised to $3.10-$3.18 from $3.00-$3.08 prior, and versus our $3.08 estimate). However, our longer-term outlook, which calls for low-double-digit revenue growth and average operating margin above 20% over the next five years, should remain intact. We expect our revised assumptions to lift our $69 fair value estimate by less than a mid-single-digit rate, at which level we'd still consider shares to be overvalued.
This quarter's results also reinforce our view that Lululemon's strategy of selling directly to consumers is beneficial to its brand intangible asset. From our vantage point, this allows the firm to enhance customer loyalty and glean insights into its customers' preferences. As evidence, traffic increased 30% during the quarter. The firm also experienced double-digit comp growth in both its men's and women's businesses, as well as for bras and accessories, showing that its product set continues to resonate with evolving consumer tastes.
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Sonia Vora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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