Lululemon experiences outcomes for the second quarter of tomorrow: will it preserve success whereas battling provide chain prices?

Lululemon Athletica‘s (NASDAQ: LULU) first-quarter gross sales rebounded from final yr’s pandemic-induced drop. Nevertheless, the restoration was not straightforward. The sportswear maker faces a brand new set of challenges relating to its provide chain and materials shortages, and traders can be keen to know its influence when the corporate releases its outcomes tomorrow.

With economies reopening and an increasing number of individuals visiting shops in individual, buyer curiosity is clearly growing in comparison with final yr. Moreover, the hotter climate means individuals have interaction in out of doors health actions extra incessantly, which means the corporate’s second-quarter gross sales are additionally anticipated to be pushed by a seasonal tailwind. The issue, nevertheless, is assembly this buyer demand in an economical method.

Lululemon is buying and selling at a futures price-to-earnings ratio of 58. Picture supply: Getty Photos

Sturdy gross sales, however keep watch over prices

Traders can pay shut consideration to administration’s feedback on the corporate’s provide chain. A number of firms are reporting issues with shortages of supplies and rising prices of transport merchandise. Stock ranges for the second quarter ought to give some indication of whether or not this is a matter at Lululemon. As of the top of the final quarter, the corporate reported $ 733 million in stock available, a 17% improve from ranges a yr in the past, which ought to allay speedy considerations.

The excellent news about provide shortages within the business is that fewer firms are providing reductions and promotions, which implies extra merchandise are bought at or close to full worth. It stays to be seen whether or not larger margins on items can be sufficient to offset the elevated prices of supplies and freight.

And as provide chain shortages persist throughout all industries, shareholders will need to watch the corporate’s stock ranges because the second quarter ends. If the corporate has robust gross sales however fails to replenish stock, it may damage gross sales for the following quarter or two.

Income elevated 88% in its final quarter. After all, that was in comparison with the decrease numbers from the identical interval final yr, when a lot of its shops have been nonetheless closed. But wanting again two years, the gross sales of the shops operated by the corporate have been 3% larger. In the meantime, e-commerce income grew 55% from final yr.

Digital gross sales stay the important thing

Lululemon has a powerful digital channel the place e-commerce gross sales totaled 44% of income within the final quarter. That is related as a result of digital gross sales are direct to buyer gross sales that get rid of one other retailer in between and thus improve revenue margins. In distinction, rival Nike (NYSE: NKE) typically sells its merchandise by retailers like Nordstrom and Macy’s. Nike has to promote its merchandise to the aforementioned chains at decrease costs in order that they’ll additionally make a revenue, which is consuming away at Nike’s margins.

Certainly, Lululemon has averaged an working revenue margin of 21.2% over the previous decade, whereas Nike has averaged 13.2%. And on the similar time, Lululemon is growing its income to greater than double the speed of Nike. The upper revenue margin can partly be attributed to its strong digital channel, whereas the upper development is partly resulting from departing from a smaller income base.

What this might imply for traders

Wall Road analysts count on Lululemon to report income of $ 1.33 billion and earnings per share of $ 1.18 within the second quarter. If the corporate experiences estimated EPS development, it might be a 59% improve from the earlier yr.

A graph comparing the price / earnings ratios of Nike and Lululemon.

Knowledge supply: YCharts.

With the worst of the pandemic behind him, Lululemon seems to be in an ideal place. It’s buying and selling at a futures P / E of 58, in comparison with Nike’s 38 (see chart). Nevertheless, the premium might be justified on condition that Lululemon operates with significantly better revenue margins and grows income quicker than Nike. Lengthy-term traders could be ok with including the inventory to their portfolio.

This text represents the opinion of the writer, who could disagree with the “official” suggestion place of a premium Motley Idiot consulting service. We’re heterogeneous! Difficult an funding thesis – even one in all our personal – helps us all to suppose critically about investing and make selections that assist us grow to be smarter, happier, and richer.

About Edith J.

Check Also

Here is why you need to put money into Covenant Logistics Group (CVLG)

Heartland Advisors, an funding administration agency, has printed its letter to traders “Heartland Worth Fund” …