Athletic clothing retailer Lululemon (LULU) reported fantastic second quarter results Friday. Sales increased 33% year-over-year to $282.6 million, roughly in-line with consensus estimates. Earnings per share, excluding a tax adjustment, grew 31% to $0.34, about a penny better than expected. The firm also raised its full-year revenue guidance to $1.34-$1.36 billion from its previous range of $1.32-$1.34 billion, but roughly in-line with current consensus expectations. However, the company substantially increased its earnings outlook, raising its full-year range to $1.76-$1.81 from $1.55-$1.60-well ahead of a consensus estimate that called for $1.65 per share.
Though Lululemon's gross margin fell 220 basis points year-over-year to 55.1%, the measure was slightly better than expected and came in well above peers Nike (NKE) and Under Armour (UA). For an extensive valuation analysis of Nike or Under Armour, please click here or here (pdf), respectively. Most impressive, in our view, was Lululemon's ability to generate robust free cash flow while building inventory. In anticipation of a strong fourth quarter, inventory increased 20% from the end of January, to $125 million. Unlike Under Armour, which continues to generate little cash, Lululemon has generated $63.5 million in operating cash flow year-to-date, up 225% compared to the same period a year ago. Plus, this new cash isn't being eaten up by investment, as free cash flow was just short of $24.5 million. It's important to note that the most recently-reported quarter isn't the time of the year when the company generates most of its cash flow.
We continue to think the high-growth retailer will continue to meet its lofty expectations and generate tremendous amounts of cash. Same-store sales increased 13% (15% ex-currency) in the second quarter, a figure any retailer would be envious of. The firm now has $444 million in cash, no debt and the brand shows no signs of slowing. Though shares trade at over 45x earnings, we'd much prefer this name to Under Armour, which, as we've said, generates virtually no cash and trades at a higher multiple. Still, shares of Lululemon now trade within our wide fair value range and score just a 3 on the Valuentum Buying Index (our stock-selection methodology). As a result, we aren't interested in adding shares to the portfolio at this time.