Investment Q&A

LULU: EPS of $3.15 beat estimates of $2.96. Revenue of $2.37B missed estimates of $2.41B. Sales guidance was dropped but earnings guidance largely maintained. Fast-tracking innovation and better near-term execution on women's are key to Lululemon regaining momentum and reaccelerating sales. The company's weaker 2Q results were largely due to less newness in women's colors, prints, silhouettes and patterns, reducing conversion, even as traffic rose in stores and online. Below-consensus 3Q sales guidance for a 6-7% gain and a lowered 2024 view reflect 2Q's weakness persisting. Any upside to guidance hinges on customers' response in 2H. Management expects to return to historical levels of newness in the spring. Strength in men’s and international, along with an improving US business next year, are key to reaching 2026's $12.5 billion revenue goal. Gross margin may still be supported by unchanged markdowns for the year, in line with 2Q. 

ULTA: EPS of $5.30 missed estimates of $5.49; revenue of $2.55B missed estimates of $2.61B. Guidance was reduced. Ulta Beauty's 2Q miss and steep downward revision to full-year sales and earnings guidance reflect challenges in drawing in-store shopper traffic, along with lower transactions and fewer impulse or add-on purchases. Same-store sales fell 1.2% -- the worst in 14 quarters -- with further declines likely in 2H, based on annual guidance, which has now been lowered twice on weaker-than-expected demand. Ulta is still planning to open 60-65 new stores this year, which should be a good strategic move as it should aid awareness while competition remains strong in the category. Revised guidance for operating margin and earnings reflects continued pressure on the top line, and the likely need to increase promotions in 2H. Not great results, but the stock is cheap and with Buffett's new support we would expect some stabilization a bit lower. 

While we think both are OK generally, LULU likely has more upside from current levels. It has been hit hard, but the company has always found a way to get its mojo back. If we look at a wider picture, EPS has still tripled since 2021 despite recent weakness.