Why Lululemon Stock Fell despite Impressive Q3 Earnings

Lululemon (LULU) stock declined 4.5% in after-market trading hours on December 11 even though the company’s fiscal 2019 third-quarter earnings beat Wall Street’s expectations. The company also raised its full-year guidance. However, its fourth-quarter earnings outlook disappointed investors. Lululemon stock was down 4.8% as of 10:35 AM ET today.

The company expects its fourth-quarter EPS to be $2.10–$2.13, while analysts’ forecast is $2.13. Lululemon expects revenue in the range of $1.315 billion–$1.330 billion in the holiday sales quarter. Wall Street’s revenue forecast is $1.33 billion.

Key drivers behind Lululemon’s third-quarter earnings

Lululemon’s third-quarter adjusted EPS of $0.96 beat Wall Street’s estimate by $0.03. Moreover, its EPS rose 28% YoY (year-over-year) compared to its adjusted EPS of $0.75 in the third quarter of fiscal 2018. Strong revenue growth and better margins drove Lululemon’s earnings growth.

The company’s gross margin expanded about 70 basis points YoY to 55.1%. Lower product costs, a favorable product mix, lower markdowns, and a decrease in occupancy and depreciation costs as a percentage of sales helped improve its gross margin. However, currency headwinds and the company’s additional investment in product development and its supply chain hurt its gross margin. Meanwhile, its operating margin expanded about 100 basis points YoY to 19.2%.

Lululemon’s revenue rose 22.5% YoY to $916.14 million and exceeded analysts’ estimate of $899.66 million in the third quarter. Its revenue from company-operated stores increased 21.5% YoY to $579.5 million due to contributions from new stores and comparable store sales growth of 10%. The company’s top line has benefited from 53 net new store additions since the third quarter of fiscal 2018. It added 19 net new stores in the third quarter of fiscal 2019.

Direct-to-consumer revenue (including e-commerce websites and mobile apps) grew about 30% to $246.7 million and also boosted the company’s overall revenue. This impressive growth was a result of higher website traffic. However, foreign currency fluctuations pulled its overall third-quarter revenue down by $6.8 million.

Improved outlook

Lululemon now expects fiscal 2019 revenue of $3.895 billion–$3.910 billion. Earlier, the company expected revenue of $3.800 billion–$3.840 billion. It expects fiscal 2019 EPS of $4.75–$4.78 compared to its previous forecast of $4.63–$4.70.

The impressive momentum in Lululemon’s performance could continue with the support of its loyalty program and expansion in the self-care and men’s categories. The company’s revenue from the men’s business grew by 38% in the third quarter.

Lululemon is also investing in innovation, the strengthening of its digital business, and further expansion in international markets. The company aims to double its men’s and digital businesses by the end of 2023. It also plans to increase its international business by four times by the end of 2023. Lululemon continues to expand its store networks in Europe and Asia.

As of December 11, Lululemon stock was up 91.7% YTD (year-to-date). It’s outperformed the stocks of its peers Nike (NKE), Under Armour, and Columbia Sportswear, which have risen 31.1%, 8.7%, and 9.6%, respectively, on a YTD basis. The S&P 500 was up 25.3% YTD as of yesterday.

Rival Nike will announce its fiscal 2020 second-quarter results on December 19. Analysts expect Nike’s revenue to rise 7.5% YoY to $10.1 billion. There’s been an upward revision in analysts’ predictions for Nike’s earnings. Currently, they expect an 11.5% rise in the company’s second-quarter adjusted EPS to $0.58.