Lululemon is rockin’ and this trade got a spring in its step

Impressive. High-end sportswear retailer Lululemon Athletica (LULU) put on another big quarter, adding to a long list of big quarters. Even in this difficult environment for retailers. Lululemon released the company’s second quarter financial results on Thursday evening, in case you hadn’t noticed already. For the three-month period ended July 31, LULU posted adjusted EPS of $2.20 (GAAP EPS: $2.26) on revenue of $1.868 billion. These top and bottom results easily beat Wall Street, while the number of sales was good enough for a 29% year-over-year growth.

Looking inside some of those numbers, sales were up 28% in North America and 35% elsewhere. Total comp sales increased 23%, or 25% in constant currency. Model store sales increased 16% (18% cc), while direct-to-consumer model sales increased 30% (32% cc). Direct-to-consumer sales now account for 42% of total revenue generation, up from 41% a year ago.

Gross profit rose 25% to $1.1 billion, while gross margin contracted 160 basis points to 56.5%. Adjusted operating margin, however… increased by 30 basis points. (Unadjusted operating margin increased 140 basis points.) Operating income increased 38% to $401.2 million. Lululemon Athletica opened 21 net new company-operated stores during the period, ending with an equal number of 600 on July 31.

Outlook

For the current quarter, LULU forecasts net revenue of $1.78 billion to $1.805 billion. This represents a compound annual growth rate of 25% over three years and is higher than the $1.73 billion that Wall Street was seeking. Diluted EPS is between $1.90 and $1.95, which is well above the consensus opinion of $1.78.

For the full fiscal year, LULU expects to generate $7.865 billion to $7.94 billion in net revenue. Again, Wall Street was down about $7.69 billion on that number. Diluted EPS is expected to land in a range of $9.82 to $9.97. Adjusted EPS, which will exclude the sale of an administrative office building, is estimated between $9.75 and $9.90. That’s well above the $9.40 Wall Street had in mind.

Balance sheet

It’s going to be interesting. LULU ended the quarter with net cash of $498.8 million, compared to $1.26 billion six months ago. Inventories stand at $1.462 billion, down from $966.5 million six months ago. Current assets ended July at $2.387 billion, down from six months ago but still up from a year ago.

I want to emphasize that while LULU has turned a significant portion of cash into inventory, while high inventory has been an issue for most retailers this quarter, LULU caters to a high-end customer base and has no no known drop in demand. LULU has not had to and may not have to resort to discounts to deal with bloated inventory.

Current liabilities stand at $1.207 billion, leaving the company with a current ratio of 1.98. Very healthy, especially if stocks hold their declared value. You know I’m hesitant to “do” quick ratios for retailers because the business by nature is inventory dependent, but I’ve done them often this season because this season is different and inventory valuations (although LULU seem different ) were suspect. If we omit these high stocks, LULU’s quick ratio would be 0.77. Not terrible for a trader even in normal times.

Total assets are $4.921 billion, including $453.8 million in “goodwill” and other intangible assets. At less than 10% of total assets, this figure is likely an underestimate. Total liabilities less equity is $2.063 billion, including no entries for short-term and long-term debt. This record is gold. If inventory valuations hold, it’s platinum.

Wall Street

Not a huge answer. I’ve only seen four sell-side analysts rated three stars or better by TipRanks who have given their opinion on LULU since these results were released. There are several others who have expressed their opinion, but I think even including “three-star” analysts is a bit sketchy. We would only get two if we stuck to our usual four star standard. Again, there are far fewer highly rated analysts than a few months ago.

Among these four analysts, there is a “buy” rating and three “hold” or equivalent hold ratings. The average target price for these four stocks is $355.75, with a high of $396 (JP Morgan’s Matthew Boss) and a low of $304 (BMO Capital’s Simeon Siegel). Siegel is rated four stars, while Boss is rated three.

My minds

What’s not to like? The execution of the company is excellent. The demand is there. Orientation is hot. The balance sheet is solid. Heck, the adjustments made weren’t in their favor. LULU actually made adjustments that reduced GAAP profitability. How often do you see this? The only thing I see that would slow me down, besides high inventory (maybe that’s not a thing), is valuation. At 29 times forward earnings, the stock is not cheap.

Readers will see that in August, LULU peaked at what was very close to a 38.2% Fibonacci retracement of the stock’s November 2021 to May 2022 selloff. of August now comes in the form of a beanie model. The selloff that peaked on Thursday becomes the handle. This mug with handle creates a pivot at $335.

This pivot point may be a little too much to ask on Friday, but the title will move within striking distance. Both the daily MACD and the stock market RSI will rise when trade opens on Friday.

Lululemon Athletica

– Target price: $400 (subject to the pivot being taken successfully)

– Pivot point: $335 (200 day SMA)

– Panic: $300 (50 day broken SMA)

Receive an email alert each time I write an article for Real Money. Click “+Follow” next to my signature for this article.