Lululemon's stock (LULU) surged as much as 12 per cent on Friday, as customers continue to buy pricey athletic wear despite a challenging inflationary environment.
The Vancouver-based athletic wear company hiked its full-year earnings forecast on Thursday as sales surged in the second quarter of the year. Revenue in the quarter jumped 29 per cent annually to $1.9 billion, as sales increased 28 per cent in North America and 35 per cent internationally. Lululemon now expects net revenue for the full year to be in the range of $7.865 billion to $7.946 billion, and diluted earnings per share of between $9.82 and $9.97. That's up from a previous estimate for net revenue of between $7.610 billion and $7.710 billion, and diluted earnings per share of between $9.42 and $9.57.
"These results are even more compelling considering the difficult macroeconomic environment in which we are operating," chief executive Calvin McDonald said on a conference call with analysts on Thursday following the release of results.
Lululemon's stock soared as much as 12 per cent on Friday. Shares of the yoga pants maker were trading at $322.85 as at 10:55 a.m. ET, an increase of nearly 10 per cent from Thursday's close.
Many retailers have been challenged by rising inflation this year, which has seen expenses increase and consumers increasingly turn to discount brands as household budgets are squeezed.
However, Lululemon says it has not seen major shifts in consumer behaviour.
"Given the current macro backdrop, we have been looking closely at our guest data and metrics to identify any shifts in spending patterns, behaviours or habits. To date, I'm pleased to show that we are not seeing any meaningful variation in cohort behaviour or the metrics we track in this area of the business," McDonald said.
In fact, Lululemon has picked up new customers. Transactions with first-time guests increased 20 per cent in the second quarter, while transactions with existing guests were up in the high teens.
"Importantly, we are not creating this traffic through markdowns or price promotions," McDonald said. Lululemon implemented what it said were "modest increases" on approximately 10 per cent of its product assortment this year. The company says it has yet to see price resistance among its customers.
"Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy and we have no plans to do so," McDonald said.
Morgan Stanley analyst Alex Straton raised the company's price target from $315 per share to $343 per share on Friday, saying the results demonstrate Lululemon's "ability to outperform in a challenging environment."
"Underlying sales growth accelerated (quarterly) despite mounting consumer pressure, and was notably driven by balanced growth across all channels, geographies and categories," Straton wrote, saying "stand-out is an understatement" for the results.
"We think there's only further room to run from here."
All eyes on inventory levels
But some analysts are concerned about growing inventory levels, which climbed 85 per cent from the same time last year. Many retailers have reported bloated inventories amid changes in consumer speeding, including Walmart, resulting in higher-than-normal markdown activity.
While Lululemon says it has no plans to increase its markdowns, BMO Capital Markets analyst Simeon Siegel says the company's inventory "needs monitoring."
"Although management noted comfort with inventory, we cannot ignore +85 per cent inventory," he said.
"How the company effectively clears this growing inventory will prove very important."
Jefferies analyst Randal Konik recently downgraded Lululemon's stock to "underperform." In a note to clients on Friday, Konik said "Lululemon will likely have to walk back its long-term projections as competition rises, end markets weaken and promos increase industry-wide," noting that inventory growth remains elevated, and poses incremental markdown risk.
"We believe (the second quarter) is the peak and would recommend selling shares at current levels," Konik wrote.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.