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Will Lululemon's share price sprint ahead of rivals after Q2 results?

Expectations are for Canadian athleisure giant Lululemon [LULU] to post increased earnings on higher revenues when it updates the market on Thursday.

Lululemon’s share price has rocketed this year, crushing the performance of its nearest rivals. Driving optimism is the Vancouver-based company's success in both men and women’s apparel - something masculine rival Under Armour has failed at –, as well solid financials.


What's happening with Lululemon's share price?

Year-to-date, Lululemon’s share price has leapt an impressive 46.9%, beating Nike's [NKE] 12.7% gain and Under Armour's [UAA] 2.2%.

However, over the past month the Vancouver-based company's stock is down over 5%. That’s still better than rival Under Armour, which has tanked over 34% since 29 July, after its Q2 results revealed the firm are struggling in North America. Investors will be hoping Lululemon won't suffer a similar fate when it releases its Q2 numbers next week.


What happened in Q1?

Lululemon’s earnings in Q1 were up a massive 20% to come in at $782 million year-on-year. Gross profit was $421 million, up 22%. Revenue growth was seen in Lululemon's international business, up 39%, and in broadening its appeal to both sexes, with revenue in male apparel up 33%.


What to expect for fiscal Q2?

For fiscal Q2, Lululemon issued guidance for earnings per share to come in at between $0.86 and $0.88. The company expects revenue to come in at between $825 million to $835 million. 

According to Zacks, Wall Street thinks Lululemon will post earnings of $0.89 per share, up 25.24% year-on-year. Revenue expectations are $842.41 million, up 16.4% from the same period last year.

For the full year, Zacks Consensus Estimate expects earnings of $4.70 per share and revenue of 3.79 billion, up 22.4% and 15.37% respectively.


Estimated year-on-year EPS increase


What’s driving growth?


Good use of investor money

Simply Wall Street have pegged Lululemon's future return on equity at 44.3%, well above the site’s luxury sector average, which comes in at 0.12%. ROE is a favoured metric of investors like Warren Buffett – the latter citing it as an indication of the company’s ability to utilise shareholder capital efficiently.

Adding debt into the mix, you start to get a sense of the strength of Lululemon. The company is free of net debt with a strong balance sheet, and is putting profits back into the business.


Future return on equity according to Simply Wall St


New loyalty program drives growth

Lululemon’s newly launched loyalty program could significantly add to revenue. Rolling out one city at a time, the program costs $100 to join and rewarding members with access to exclusive classes and clothes.

Lululemon has a reputation for loyal customers so the program looks to be a solid way to drive profits. One Stiefel analyst believes the program could add $0.50 a share to earnings once it has fully rolled out.

According to CEO Calvin McDonald, reception to the program has been favourable in every market tested. McDonald promised to update the market on this during last quarter’s earnings call. Definitely something to look out for next Thursday.


Is a beat in store?

Lululemon has form for beating analyst expectations. The company have beaten Zacks Earnings ESP (expected surprise prediction) in the last four quarters. Last quarter, Lululemon's earnings per share came in at $0.74, beating the expected $0.71.

For Q2, Zacks Earnings ESP comes in at 2.74%, suggesting another earnings beat is on the cards.


Market cap$23.80bn
PE ratio (TTM)47.95
EPS (TTM)3.81
Operating Margin (TTM)21.32%

Lululemon share price vitals, Yahoo finance, 29 August 2019


Is Lululemon a buy?

Expectations of revenue growth and a history of beating market expectations are positive signs for any trader.

For investors looking to get into athleisure wear stocks, Lululemon carries a 47.95x price to earnings ratio, well below Under Armour's expensive looking 97.33x. Earnings per share over the twelve trailing months comes in at 3.81, again beating Under Armour which carries a 0.19 EPS TTM.

Analysts covering the stock have a consensus ‘Buy’ rating. The average price target is $195.4. Hitting this would represent an 7% upside on the current share price.

Disclaimer Past performance is not a reliable indicator of future results.

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