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Here's Why You Should Include lululemon in Your Portfolio

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. The company’s focus on enhancing its e-commerce site and international growth bodes well. Also, the company is on track with its strategy for 2020.

All these helped the company to deliver robust fourth-quarter fiscal 2018 results, wherein both the top line and the bottom line grew year over year and also surpassed the Zacks Consensus Estimate. As a result, management provided a solid view for the first quarter and fiscal 2019.

In the past year, shares of this Zacks Rank #1 (Strong Buy) stock have surged 69.4%, outperforming the industry’s growth of 13.8%.


 

Let’s take a closer look at the aspects driving the company’s performance.

Factors Narrating lululemon’s Growth Story

lululemon is strongly focused on enhancing the e-commerce retailing channel and investing in the innovation of new product categories and bringing improvements to its website. Improved capabilities in personalized digital marketing and data analytics led to traffic and conversion growth at the company’s site in the fiscal fourth quarter.

As a result, traffic at e-commerce sites rose more than 30% while conversion increased low single digits. Direct-to-consumers (DTC) comps surged 37% (or an increase of 39% in constant dollars) in the fiscal fourth quarter. E-commerce contributed $344 million or nearly 30% to total sales in the fiscal fourth quarter. Moreover, e-commerce penetration reached 26% in fiscal 2018, ahead of the targeted 25% penetration for fiscal 2020.

Apart from this, the company has an unmatched level of long-term growth opportunity in the industry, based on its potential to expand square footage and enhance business globally. It remains focused on expanding operations outside the U.S. and Canada, particularly in the European and Asian markets.

This is evident from total market growth of more than 70% and nearly 60% recorded in Asia and Europe, respectively, in the fiscal fourth quarter. Overall, the company plans to expand its international base by opening 25-30 stores in fiscal 2019.

Moreover, the company is on track with its strategy for 2020 to double revenues to about $4 billion and more than double its earnings. To achieve these targets, management had outlined four distinct growth strategies, including product innovation, building store fleet in North America, expanding digital business and international expansion.

With more customers turning to online portals, the company expects this channel to account for over one-third of its sales by 2020. With regard to international expansion, it remains keen on expanding store base overseas and expects its international business, including e-commerce, to account for nearly 20–25% of the total sales by 2020.

Recently, the company announced a five-year plan namely Power of Three, which aims at doubling sales in the men’s and digital categories, and quadrupling sales in the international unit by 2023. It witnessed robust growth in 2018 and also accomplished three of its 2020 goals. This five-year plan focuses on three core objectives: product innovation, omni-guest experiences and expansion efforts. It also comprises of contributions from the company’s membership program, which is currently in the testing phase.

In addition, management highlighted that it will continue to concentrate on women’s and accessories businesses in North America that have been performing well for a while now. The women’s business and stores in North America are likely to deliver sales growth of low double-digits annually in the next five years.

Robust View

For fiscal 2019, lululemon projects revenues of $3.7-$3.74, with comps growth of low-double digits, on a constant-dollar basis. It expects modest gross margin expansion, driven by anticipated gains in product margins, and leverage on occupancy and other fixed costs. Earnings for the fiscal year are projected in the range of $4.48-$4.55 per share.

For first-quarter fiscal 2019, lululemon anticipates revenues of $740-$750 million, with constant-dollar comps expected to increase in low-double digits. The company expects gross margin to expand marginally from the year-ago quarter. This is likely to be driven by higher product margins and steady reduction in average unit costs backed by the ongoing supply-chain initiatives to scale efficiencies. lululemon envisions earnings of 68-70 cents per share for the fiscal first quarter compared with adjusted earnings per share of 55 cents in the year-ago quarter.

Going ahead, we expect all the aforementioned factors to continue bolstering the company’s performance, and help it remain in investors’ good books.

Other Key Picks

G-III Apparel Group, Ltd. GIII outperformed the Zacks Consensus Estimate by a wide margin in the trailing four quarters. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ralph Lauren Corp. RL has a long-term earnings growth rate of 10.3% and a Zacks Rank #2 (Buy).

Columbia Sportswear Company COLM has a long-term earnings growth rate of 8.9% and a Zacks Rank #2.

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