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Here's What Makes lululemon a Promising Investment Option

Zacks Equity Research

lululemon athletica inc. LULU appears to be a preferred pick, as it seems to have all it takes to catch investors’ attention. Notably, the company’s merchandising policies and investments to achieve growth across sales channels are yielding results. Also, it is benefiting from continued product innovation, enhancement of omni-channel experience and sturdy international growth. Additionally, it is progressing well on the Power of Three strategic plan, which aims at doubling sales in the men’s and digital categories, and quadrupling sales in the international unit by 2023.

All these factors helped the company to deliver robust second-quarter fiscal 2019 results, wherein it continued positive earnings and sales surprise for the 10th straight time. Also, the top and bottom lines grew year over year.

Robust second-quarter fiscal 2019 performance prompted management to provide a solid view for the third quarter and lift the fiscal 2019 view despite the anticipated impacts of tariff increase and airfreight costs. For third-quarter fiscal 2019, lululemon expects revenues of $880-$890 million, with constant-dollar total comps expected to increase in the low-teens. The company envisions earnings of 90-92 cents per share for the fiscal third quarter compared with 71 cents recorded in the year-ago quarter.

For fiscal 2019, revenues are now expected to be in the range of $3.8-$3.84 billion, up from $3.73-$3.77 billion mentioned earlier. Earnings for the fiscal year are projected to be $4.63-$4.70 per share, up from $4.51-$4.58 stated earlier.

We note that, shares of the company have increased 17.2% in the past six months, outperforming the industry’s decline of 9.8%. This Zacks Rank #2 (Buy) stock has also outperformed the Consumer Discretionary sector that declined 3.7% and the S&P 500 Index that advanced 1.7%. Further, the stock is hovering close to its 52-week high of $204.44. With a long-term earnings growth rate of 18.2%, lululemon is positioned to attain new highs.



Factors Narrating lululemon’s Growth Story

lululemon’s product innovation plan focuses on testing new categories. The company has identified several new areas which it can test to bring innovation to guests. One category where it is testing is the self-care, which includes products such as deodorants, moisturizers and shampoo. The tests for this category were rolled out to 50 stores and online in mid-June 2019. Consumer response to innovations in the self-care category looks encouraging so far. Moreover, management has a strong pipeline of product launches lined up in the category in fiscal 2019.

Additionally, the company intends to tap into customers’ growing preference for athleisure by launching new product lines related to activities like yoga, running and training. Expansion of office luggage and travel bags, and continued partnerships are some of the other product-related initiatives. It expects to witness adequate growth potential in the outerwear category. Therefore, the company plans to introduce waterproof wool this fall. It also relaunched the Metal Vent collection under the ‘Science of Feel’ approach.

lululemon is looking for new and exciting ways to connect with customers, as clear from the testing of its loyalty program. It has expanded its online-only size and color offerings for men and women, which is a testament to its efforts to attract digital guests. Moreover, it expanded the “buy online pick up in store” capability across all stores in North America, reflecting an improvement from 150 stores at the end of the first quarter. The company also improved its mobile point-of-sale capabilities to help guests complete their purchases from anywhere in the store.

Backed by such endeavors, it delivered strong comps across channels during second-quarter fiscal 2019. Total comps, including comparable store sales and direct-to-consumer (DTC) sales, advanced 15% and rose 17% in constant dollars. Speaking solely of the digital channel, comps improved 31% in constant dollar.

During the fiscal second quarter, e-commerce sales contributed nearly 25% to total revenues. Consistent rise in comps indicates growth in traffic and conversion rates across stores as well as online. Management plans to roll out new features across its digital ecosystem to boost consumer engagement.

Moreover, lululemon has already built a strong customer base in the United States and Canada, where it sees growth potential in years ahead. Additionally, the company is poised to boost international revenues by executing expansion plans in China, Asia Pacific and EMEA, which are its key growth regions. Of these, it is poised for impressive growth in China in fiscal 2019.

The company recorded nearly 68% market share growth in China in the fiscal second quarter. Growth in China was a key contributor to the 33% increase in revenues in the Asia Pacific region in the reported quarter. In Europe, the company delivered 35% market share growth in the fiscal second quarter.

All said, we are convinced that lululemon’s growth plans will help keep its stellar show to go on.

3 Other Stocks to Watch

Guess, Inc. GES has a long-term earnings growth rate of 17.5% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Under Armour, Inc. UAA has a long-term earnings growth rate of 27.8% and currently carries a Zacks Rank #1.

Delta Apparel, Inc. DLA has a long-term earnings growth rate of 15% and a Zacks Rank #2 at present.

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