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Lululemon stock soars as earnings show company's customers are still visiting its stores in droves and paying full price

By Ciara Linnane

Yoga-wear company's traffic is showing none of the slump plaguing other clothing retailers

Lululemon Athletica Inc. stock rose 10% Friday to put it on track for its biggest one-day percentage gain in more than two years, after the yoga-wear retailer reported stronger-than-expected quarterly earnings and said it was seeing "momentum" in sales.

The last time the stock (LULU) gained as much was on March 24, 2020, when it gained 11.9%, according to data from Dow Jones data group.

Lululemon posted net income of $290 million, or $2.26 a share, compared with $208 million, or $1.59 a share, in the second quarter of 2021. Adjusted for one-time items, the retailer earned $2.20 a share.

Sales rose 29% to $1.9 billion, the company said, including a 28% rise in North America and a 30% jump in direct-to-consumer sales. Same-store sales rose 23%, Lululemon said.

Analysts polled by FactSet expected the company to post adjusted earnings of $1.86 a share on sales of $1.77 billion. Same-store sales were expected to grow 17.9%.

Chief Executive Calvin McDonald said traffic to stores and e-commerce sites remained robust, despite the challenges in the macroeconomic backdrop.

"New guest acquisition remains strong, with transactions by first-time guests increasing over 20% in (the) quarter," McDonald told analysts on the company's earnings call, according to a FactSet transcript.

"Transactions by existing guests increased in the high teens. Traffic across channels remains robust, with store traffic up over 30%, and e-commerce traffic increasing over 40%. And importantly, we are not creating this traffic through markdowns or price promotions. Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy and we have no plans to do so."

Still, inventories rose 85% to $1.5 billion at quarter-end, up from $800 million in the year-earlier period. "The company believes its inventories are well positioned to support its expected revenue growth in the third quarter," it said in its earnings release.

An inability to clear inventories to make way for fresher products and steep declines in traffic to stores has plagued most other clothing retailers this earnings season.

Don't miss: Here's what the big inventory problem for retailers looks like

Related:It's not just inflation. People aren't visiting clothing stores like they used to because they're sick of loungewear

Stifel analysts said the report shows the Lululemon customer is still engaged with the brand and is not reducing spending due to inflationary pressure.

"Big picture, Lululemon is enviably positioned at the intersection of powerful secular trends, and the combination of scale and brands holistic approach to well-being provides competitive distinction," analysts led by Jim Duffy wrote in a note. "Through both adding new consumers to the franchise and expanding the range of offerings to the growing consumer base, we expect strong growth for multiple years."

Stifel rates the stock a buy and raised its price target to $400 from $381.

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Cowen analysts, who also rate the stock the equivalent of buy, raised their price target to $531 from $512. "The brand is showing remarkable strength and outpacing all peers in a touch macro (environment)," wrote analysts led by John Kernan in a note.

Guggenheim analysts said the quarter showed "balanced growth," noting North American sales were up 28%, international up 35%, men's up 27%, women's up 24% and accessories up 80%.

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"We believe the company's strong financial performance is supported by continued momentum and expansion in the business globally and justify the shares' premium valuation," they wrote in a note, reiterating a buy rating and $475 price target.

But Jefferies analysts homed in on the 80% growth in accessories, which they said were mostly due to the popularity of belt bags, a trend they had identified would be a key driver in the second quarter.

See now: Lululemon stock's a sell, says Jefferies; analysts expect company to dial back aggressive long-term goals

Analysts led by Randal J. Konik reiterated their stance from earlier this week that the company will have to dial back long-term projections in the coming quarters, amid increased competition, weakening end markets and as promotions and discounts spread across the industry. Jefferies had downgraded the stock to sell on Monday, and on Friday stuck with that move.

"While impressive, YoY growth in the company's Men's business has declined sequentially for 5 consecutive quarters. Further, we believe the company's strong accessories' performance is likely unsustainable and could drive difficult first half compares ahead," the analysts wrote.

Lululemon shares are down 18% in the year to date, while the S&P 500 has fallen 16%.

-Ciara Linnane


(END) Dow Jones Newswires

09-02-22 1407ET

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