Send me real-time posts from this site at my email
Motley Fool

Lululemon Reports Q2 Earnings Tomorrow: Will It Maintain Success While Battling Supply Chain Costs?

Lululemon Athletica's (NASDAQ: LULU) first quarter sales bounced back from last year's pandemic-induced drop. That said, the recovery hasn't been smooth. The athletic apparel maker is facing a new set of challenges regarding its supply chain and material shortages, and investors will be eager to understand its impact when the company reports earnings tomorrow.

With economies reopening and more people visiting stores in person, customer-interest is obviously expanding compared to last year. Furthermore, the warmer weather means people are indulging in outdoor fitness activities more frequently, which means the company's second quarter sales should be driven by a seasonal tailwind as well. The difficulty, however, is in meeting that customer demand in a cost-effective manner.

Lululemon is trading at a forward price-to-earnings ratio of 58. Image source: Getty Images

Robust sales, but keep an eye on costs

Investors will be paying close attention to management's remarks on the company's supply chain. Several companies are reporting issues with material shortages and rising costs to ship products. Inventory levels for the second quarter should hold clues whether this is an issue at Lululemon. At the end of the last quarter, the company reported $733 million in inventory on hand, a 17% increase from year-ago levels -- something that should ease immediate concerns.

The good news coming out of supply shortages across the industry is fewer companies are offering discounts and promotions, which means more products are getting sold at, or near, full price. It remains to be seen if higher merchandise margins will be enough to offset increasing costs for materials and freight.

And since supply chain shortages are still being felt across industries, shareholders will want to observe the company's inventory level at the end of Q2. If the company makes robust sales but fails to replenish its inventory, it could hurt sales for the next quarter or two.

Revenue increased by 88% in its most recent quarter. Of course, this was compared to weaker figures from the same time last year when many of its stores were still closed. Still, looking back over two years, company-operated store revenue was 3% higher. Meanwhile, e-commerce revenue increased by 55% from last year.

Digital sales still hold key

Lululemon has a robust digital channel where e-commerce sales totaled 44% of revenue in the most recent quarter. This is relevant as digital sales are direct-to-customer sales that eliminate another retailer in between and hence increases profit margins. In contrast, rival Nike (NYSE: NKE) often sells its products through retailers like Nordstrom and Macy's. Nike has to sell its products to the aforementioned chains at lower prices so they can make a profit, too, and that eats into Nike's margins.

Indeed, Lululemon averaged an operating profit margin of 21.2% over the last decade, while Nike averaged 13.2%. And during the same time, Lululemon is growing revenue at more than double the rate Nike has. The higher profit margin can partly be attributed to its robust digital channel, while the higher growth is partly due to starting from a smaller revenue base.

What this could mean for investors

Analysts on Wall Street expect Lululemon to report revenue of $1.33 billion and earnings per share of $1.18 in the second quarter. If the company reports the estimated EPS growth, it would be a 59% increase from the year prior.

Data source: YCharts.

With the worst of the pandemic behind it, Lululemon looks to be in a great position. It's trading at a forward P/E of 58, compared to 38 for Nike (see chart). However, the premium could be justified considering Lululemon operates at much better profit margins and grows revenue faster than Nike. Long-term investors can feel good about adding the stock to their portfolio.

10 stocks we like better than Lululemon Athletica
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Lululemon Athletica wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of August 9, 2021

Parkev Tatevosian owns shares of Macy's. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue