Inside the Numbers
Lululemon's revenues were 2% higher at $903 million compared to 2019's second-quarter at $883 million. It also topped expectations of $843 million. Online sales were higher by 157%. Growth in online sales offset weakness in retail sales. In-store sales dropped by 51% from last year.
Earnings per share came in at $0.74 versus expectations of $0.55 on an adjusted basis. This was a decline from last year's $0.96 per share. Currently, the majority of the company's stores are now open, and it seems that many were expecting a bigger sales bump from the reopening.
Another source of disappointment may have been the company's comments on Mirror. Mirror is a workout display and app that Lululemon purchased earlier this year for $500 million. This holiday season it will only be on display in 10 to 15 stores, meaning that its impact on the bottom-line will be minimal until next year.
For the holiday season, it expects to open about 70 pop-up shops that proved successful last year. It also has plans to open 30 to 35 new locations over the next 12 months which makes Lululemon one of the few retailers that are in expansion mode.
Stock Price Impact
The stock's poor performance following the company's results indicates that expectations were high. This is to be expected given the company's more than 50% increase year to date. Additionally, the company has a valuation of over $40 billion with sales of $3.85 billion.
This is a multiple that is more in-line with a tech stock rather than an apparel stock. So, Lululemon has to demonstrate that it can continue maintaining growth to validate this valuation. This quarter's anemic 2% growth is not enough to justify this type of valuation.
Investors may look past it as a one-time thing due to the coronavirus, but another quarter of middling growth could lead to multiple contractions which could cause a sharp fall in the stock. Another factor is that the company faces increasing competition in the "athleisure" space with lower-cost lines coming out and every company debuting their own "athleisure" line.
Another factor in the stock's weakness is that management forecast a 15 to 20% drop in EPS for the third and fourth quarter, while analysts were expecting a single-digit decline.