Lululemon (LULU) Beats Profit, Revenue and Guidance Expectations, But Stock Slides on Higher Mirror Investment; Analysts Trim PTs

Lululemon Athetlica Inc (NASDAQ: LULU) reported better-than-expected results for a quarter ending January 31. However, shares are modestly lower on higher investment in workout service Mirror.

The company earned $2.58 per share to top the $2.49 expected from the surveyed market analysts. Revenues for the quarter were reported at $1.73 billion while the Street was calling for $1.66 billion.

Online sales soared 92% in the quarter while international sales gained 47%. The North America region saw sales rising 21% while women’s and men’s sales jumped by 19% and 17%, respectively.

“Our continued growth demonstrates the strength of lululemon -- before, during and as the pandemic subsides. We are still in the early innings of our growth, fueled by exciting innovations that create even more opportunity into the future,” Calvin McDonald, chief executive officer of Lululemon, said.

More impressively, the direct-to-consumer (DTC) segment now accounts for 52% of total sales of the company in the fourth quarter, rising from 33% recorded in a year-ago period.

“We pulled forward investments in our direct-to-consumer channel, completed our first acquisition, and tightly managed expenses while also supporting our people. These measures contributed to our strong fourth quarter results, including growing revenue by 24%, and are helping fuel our even stronger top-line growth projections for 2021,” Meghan Frank, CFO of the company, said.

Lululemon also reported a beat on the revenue guidance front. The company now expects Q1 revenues to come between $1.10 billion to $1.13 billion vs $999.5 million expected. On a 2021 basis, revenue is projected in a range of $5.55 billion to $5.65 billion again higher than the $5.42 billion expected from analysts.

However, investors didn’t like that LULU plans to ramp up its investment into at-home fitness startup Mirror, which it acquired for $500 million last year. Shares of the company slipped 1.7% in pre-open Wednesday.

RBC Capital Markets analyst Kate Fitzsimons trimmed the price target to $380.00 from the prior $435.00 on higher Mirror spending. However, she still sees an “attractive risk/reward” at current levels.

“With category tailwinds continuing, strong brand health, and ongoing innovation focuses, we see LULU's momentum as strong into 2021 given multiple growth levers between ecomm, int'l, men's, innovation, and MIRROR. That said, stepped-up spending behind MIRROR this year is likely to mitigate the flow-through even as the top line (in our expectation) continues to outperform in a recovery. Looking to 2022 and beyond, we see opportunities for pent-up earnings power to be unleashed as MIRROR's investment cycle wanes and the core business continues to resonate,” Fitzsimons wrote in a note to clients.

Similarly, BofA analyst Lorraine Hutchinson lowered PT on LULU to $410.00 from $425.00 as higher Mirror investment dampens outlook.

“Management is calling for 3-5% dilution from Mirror in 2021 as it invests to fuel growth. We are surprised to see such an aggressive investment plan (Mirror is <5% of sales) and hope to hear more concrete details of the growth trajectory in the near-term. Management sees great opportunity in the subscription model, and seeks to capitalize on the momentum that at-home fitness has gained during the pandemic,” Hutchinson said in today’s note.

“The concept generated $170mn of revenue in 2020, with an expectation for $250-275mn in F21 with additional opportunities to drive guest engagement and lifetime value over the long term. F21 plans include adding 2 more production studios to triple its live class offering, increasing its instructor count by 50% to 22, and launching in Canada over holiday,” he concludes.

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