KeyBanc: 'Solid' Lululemon Q3 Shows E-Commerce Growth

Lululemon Athletica inc. LULU reported third quarter results Wednesday that exceeded analyst expectations, and the yoga apparel maker's guidance for the fourth quarter also came in better than projected.

The Analyst

KeyBanc Capital Markets' Edward Yruma maintains a Sector Weight rating on Lululemon's stock with no assigned price target.

The Thesis

Lululemon's top- and bottom-line beat in the third quarter should signify success in driving innovation, Yruma said in a research report. (See Yruma's track record here.) 

Lululemon recorded consecutive quarters of 7 percent combined constant currency comps, according to Keybanc. Perhaps more important, the ongoing momentum will carry over into the fourth quarter, Yruma said. 

Encouragingly, gross margin expanded in the quarter by 106 basis points, which marks an improvement versus management's prior guidance for flat growth in the bottom half of the fiscal year, the analyst said. The margin expansion was driven by a more favorable sales mix and lower average unit costs, which were partially offset by marginally higher markdowns.

Finally, the company's online business posted a 25 percent constant currency comp, which represents a "meaningful acceleration" from the 16 percent growth seen in the prior quarter and a "difficult" first quarter where growth was flat, Yruma said. Lululemon's e-commerce unit is benefiting from various initiatives put in place during the first quarter, including read-and-react capabilities, visual merchandising enhancements and disciplined planning, Yruma said. 

Lululemon's overall "solid" quarter signals that new products are resonating well with consumers while product cost initiatives are paying off, the analyst said. 

Price Action

Shares of Lululemon were trading higher by more than 9 percent early Thursday at $73.85, above the stock's 52-week high of $72.70.

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