Investor expectations are high heading into the first-quarter earnings report by lululemon athletica (NASDAQ: LULU). While many of its stores were closed to shoppers in recent weeks, the apparel retailer entered the crisis period with some impressive growth momentum.
Wall Street isn’t predicting that this success will shield Lululemon from sales declines in its announcement on Thursday. However, management could have some positive things to say about the digital sales channel as well as customer engagement as it begins to reopen it shops for business.
Let’s take a closer look.
Image source: Getty Images.
Sales will fall
Lululemon’s last earnings report covered the period that ended on Feb. 2, a time frame that didn’t include widespread COVID-19 related store closures that began in China and then spread to North America and Europe. As a result, it is likely that revenue trends will depart significantly from the 20% spike that management revealed in the fiscal fourth quarter.
Most investors who follow the stock are predicting that sales fell about 10% this quarter, down to $677 million, due to the temporary pause in retailing. Potential bright spots include the chain’s e-commerce channel, which has been booming in prior quarters. Lululemon kept its digital offerings widely accessible, including through curbside pickup at most locations in April and March. Look for management to discuss their latest product releases, too, in new niches like men’s apparel and outerwear.
Many apparel retailers have been forced to take large writedown charges related to the pandemic, and Lululemon might not be an exception. Costs likely didn’t decline as quickly as revenue did, after all, as the chain continued meeting commitments like wages and rent.
The bigger question for the quarter is how much merchandise Lululemon was forced to write off because it missed its demand window. That total will reflect its exposure to seasonal apparel trends, plus management’s ability to move quickly to scale back inventory purchases. Overall, investors are bracing for earnings to fall to about $0.25 per share from $0.74 per share a year ago.
Early rebound days
Most investor attention will be focused on judging how quickly Lululemon can return to its prior trends of market-thumping sales and profit growth. CEO Calvin McDonald and his team likely won’t issue a detailed outlook given major unknown variables like the path of the novel coronavirus and the wider economic growth rebound.
But the chain has already reopened hundreds of its locations since mid-May, and executives might have enough data from those stores to make comments about demand trends — at least into the fiscal second quarter.
Investors are heading into this report feeling optimistic, and most Wall Street pros are even predicting that sales will edge higher this year despite the major disruption that hit Lululemon’s business in recent months. Don’t expect management to venture a specific prediction about maintaining growth through the COVID-19 crisis. Still, the chain’s latest sales and profitability metrics, both online and in its reopened stores, will offer clues as to how patient investors will have to be in waiting to see sales gains return over the next few quarters.
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