Lululemon‘s blowout quarter has analysts stretching for superlatives

Shares of yoga wear retailer Lululemon Athletica Inc. skyrocketed on Friday, as analysts gushed over and rushed to raise estimates and stock price targets.

The stock  surged almost 15%, putting it on track for a fresh record. The last time the stock rose this much was on June 1, when the company posted first-quarter earnings that also trounced estimates.

William Blair analysts said it was a “virtually perfect second quarter,” while Bernstein called it “stunningly good.” Lululemon is “in a league of its own” with a cult following, said MKM.

“We give the company much credit for its compelling product offering, digital enhancements, supply chain improvements and marketing initiatives that are driving these exceptional results,” Canaccord analyst Camilo Lyon wrote in a note.

Lululemon beat per-share earnings estimates by 22 cents as profit rose 82%. Revenue climbed 25% to $724 million, beating estimates by 8%, driven by strength in women’s and men’s pants, a strong digital performance and strength in Asia.

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Overall same-store sales rose 19%, and digital sales were up 47%. E-commerce sales surged 65% and already account for 24.6% of sales, a whisker away from the company’s target of 25% by 2020.

Sales of women’s pants, the company’s highest margin category, rose more than 30%, as did sales of men’s pants, boosted by a fifth quarter of rising traffic to its stores. Asia sales climbed 50% and that region will be the destination for most of the new stores planned for 2019.

“We’re now tracking to meet or even exceed our $4 billion revenue goal with men’s and e-commerce effectively ahead of schedule,” Chief Operating Officer Stuart Haselden told analysts on the company’s earnings call, according to a FactSet transcript. “Our product assortments and supply chain continue to exceed expectations, contributing to our gross margin that is now firmly reaching the mid-50s range.”

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The company offered upbeat guidance for the third quarter and full year, promising same-store sales percentage increases in the low teens, further margin expansion and higher profit.

New Chief Executive Calvin McDonald, who has joined from cosmetics company Sephora where he drove mobile strategy, said Lululemon has a lot in common with his previous employer.

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“There’s this notion or spirit of a disruptive innovator, and I mentioned that that’s core to the DNA,” he said on the call. “And at lululemon, it is really throughout the entire organization.”

“These metrics are hard to believe, and more closely resemble those of a startup,” said MKM analyst Roxanne Meyer, who rates the stock a buy and raised her stock price target to $174 from $150, equal to about 11.5% above its current trading level.

“The 47% increase in DTC (direct to consumer) despite anniversarying an online warehouse sale, which was not repeated, demonstrates how advanced LULU has become in terms of its omni-channel model; we expect outsized growth in this channel to continue as personalization efforts ramp and as international sales grow,” Meyer wrote in a note.

Stifel analysts led by Jim Duffy said the company’s omnichannel model is one “to which consumer brands should aspire.”

Innovation “is moving the product forward, the retail footprint remains tight, community remains central to the brand, and a growing digital competency is being leveraged for consumer engagement and to drive traffic to stores,” they wrote. Stifel rates the stock a hold but raised its price target to $150 from $113.

William Blair analysts Sharon Zackfia and Tania Anderson said Lululemon has an “enviable competitive position with a powerful combination of highly productive stores, aspirational proprietary product, a healthy e-commerce channel, and the potential to ultimately nearly triple revenue as the concept continues to expand across the globe.” The analysts have an outperform rating on the stock.

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At Needham, analyst Rick Patel was impressed by international sales growth.

“As LULU opens more stores abroad and launches new websites (Japan and Korea are on deck for later this year), we expect its positive momentum will continue,” he wrote in a note. The overseas market accounts for just about 10% of total sales, compared with a number closer to 40% at some rivals, he said. “We see overseas expansion as its biggest growth opportunity,” he said.

SunTrust Robinson Humphrey analyst Pamela Quintillano reiterated her buy rating on the stock and raised her price target to $162 from $145. Guidance is likely conservative, she said and the company should be able to drive further gains.

“Longer term, we think it is notable that management is further testing and innovating from a position of strength and that bodes well for the evolution of the assortments over time and the company’s next leg of growth,” Quinillano wrote in a note.

Lululemon shares have gained 99% in 2018, while the S&P 500  has gained 8% and the Dow Jones Industrial Average  has gained 5%.

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